MSCI Inc. (NYSE: MSCI), a leading provider of critical decision
support tools and services for the global investment community,
announced today the results of the MSCI 2023 Market Classification
Review. In this year’s review, MSCI:
- Welcomes the proposed measures aimed at improving the
accessibility of the Korean equity market to international
investors, and will be monitoring their implementation and
effectiveness over time
- Extends the consultation on the potential reclassification
of the MSCI Nigeria Indexes from Frontier to Standalone Market
status following recent developments in the FX market
- Indicates a potential consultation on a reclassification
proposal for Egypt in case of further deterioration in market
accessibility
- Continues closely monitoring the market accessibility of the
Sri Lankan, Kenyan and Bangladesh equity markets
- Highlights the evolution of clearing and settlement cycles
across global markets
- Reminds on upcoming changes to the MSCI Frontier Markets
Indexes
“Amidst the challenging global macroeconomic environment, low
foreign exchange liquidity in various markets has been observed,
posing obstacles to the ease of fund repatriation for international
institutional investors,” said Dr. Dimitris Melas, Global Head of
Index Research and Product Development and Chairman of the MSCI
Index Policy Committee. “We are closely monitoring the challenges
observed in select Emerging and Frontier Markets.”
Dr. Melas added, “Despite these conditions, certain markets,
such as Korea, have proposed plans to enhance accessibility for
foreign investors. Once in effect, these efforts will be subject to
consultation with market participants to assess their impact and
effectiveness.”
Korea’s Market Accessibility
MSCI recognizes and welcomes the proposed measures aimed at
improving the accessibility of the Korean equity market.
In February 2023, the Ministry of Economy and Finance (MOEF)
unveiled upcoming improvements to the Korean foreign exchange (FX)
market's structure. These include allowing foreign institutions to
participate in the onshore interbank FX market upon registration,
extending trading hours, and implementing specific enhancements in
infrastructure that aim to better align with global FX markets.
These are all planned for full implementation in the second half of
2024, following a six-month pilot starting early that year.
In January 2023, the Financial Services Commission (FSC)
announced upcoming capital market advancements. These include
replacing the Investor Registration Certificate (IRC) system with
Legal Entity Identifiers (LEI) for corporations, eliminating
end-investor reporting under omnibus accounts, and expanding OTC
transactions for ex-post reporting. These improvements are planned
for potential implementation before the beginning of 2024,
following the development of necessary IT systems.
English disclosures for Korean companies will be mandated by the
FSC. This will be phased in by asset size and foreign ownership
percentage. Initially, KOSPI-listed companies with assets of KRW 10
trillion or more, or with foreign ownership of at least 30% (and
assets between KRW 2 and 10 trillion), will be required to comply
with the new disclosure requirements within 2024-2025. From 2026,
firms with KRW 2 trillion or more in assets will follow. In
addition, this year the FSC and MOEF announced updates to dividend
distribution rules for implementation in 2024.
As a reminder, the MSCI Korea Indexes were considered for
reclassification from Emerging to Developed Market status from 2009
to 2014. During and following this period, market participants
highlighted the limited convertibility of the Korean Won in the
offshore currency market, the rigidity of the ID system that makes
in‐kind transfers and off‐exchange transactions onerous, and the
lack of availability of investment instruments as important
concerns. It is important to highlight that the upcoming planned
reforms do not address the issues resulting from the restrictions
imposed by the local stock exchange on the use of exchange data for
the creation of financial products.
For MSCI to consider launching a consultation on any potential
reclassification of Korea, three things must occur. First, planned
reforms must be announced, which the Korean authorities did earlier
this year with the exception of the restrictions on use of exchange
data. Second, the announced reforms must be implemented. This step
is expected to be initiated by the Korean authorities in the latter
part of 2023. And third, international investors must experience
over time the implemented reforms in practice. This step can only
be completed once investors have had sufficient time to evaluate
the efficacy of the changes. Only following this period of
investors experiencing the reforms in practice over time, may MSCI
consult with market participants on their experiences regarding the
potential reclassification of the Korean equity market from
Emerging Market to Developed Market status.
Potential reclassification of the MSCI Nigeria Indexes to
Standalone Market status
MSCI announced today that it will continue to consult with
market participants on the potential reclassification of the MSCI
Nigeria Indexes until September 29, 2023, and will announce the
results of the consultation on or before October 31, 2023.
FX liquidity issues have continued to impact the accessibility
of the Nigerian equity market. Since the onset of these issues in
March 2020, there have been constraints in US dollar liquidity in
the market, leading to constant capital repatriation concerns and a
gap between the parallel and official exchange rates for the
Nigerian Naira. This has persistently caused index replicability
and investability issues for international institutional investors.
The feedback from market participants obtained as part of the
consultation suggests that the limited accessibility of the
Nigerian equity market, resulting from lack of liquidity on the FX
market, would warrant its removal from the MSCI Frontier Markets
Index.
On June 14, 2023, the Central Bank of Nigeria announced
operational changes to the FX Market which were effective
immediately. Such changes include, amongst others, the abolishment
of the previous FX market segmentation, merging all sectors into
the Investors and Exporters Window, and the reinstalment of the
"Willing Buyer, Willing Seller" model with no rate cap.
“We decided to extend the consultation to allow more time for
the liquidity situation in the Nigerian FX market to stabilize
following the recently implemented measures by the Central Bank of
Nigeria, abolishing the multiple exchange rate system,” remarked
Jean-Maurice Ladure, Global Head of Index Management Research and a
member of the MSCI Index Policy Committee. “We will evaluate the
impact of these measures in the context of market accessibility, in
particular the impact on the clearing of the FX queue during the
capital repatriation process. If such improvements were not to be
observed by market participants during our extended consultation
period, it would confirm that the ease of capital inflows and
outflows in the MSCI Nigeria Indexes is not to the standards
expected from Frontier Markets.”
The accessibility report for Nigeria is now reflected in the
MSCI 2023 Global Market Accessibility Review report available at
https://www.msci.com/market-classification.
Deterioration in the Accessibility of the Egyptian Equity
Market
The market accessibility of Egypt has deteriorated due to low
liquidity in its onshore FX market. In particular, market
participants have recently reported the reemergence of a queue for
US dollar liquidity, affecting foreign investors’ ability to
repatriate capital in a timely manner. In response to this, MSCI
introduced a special treatment in the MSCI Egypt Indexes in May
2023 to potentially reduce the number of changes in related indexes
and mitigate index replication concerns.
MSCI continues to welcome feedback on the level of accessibility
of the Egyptian equity market and will closely monitor the
situation. In the event of further deterioration of market
accessibility in Egypt, MSCI may launch a consultation on a
reclassification proposal for the MSCI Egypt Indexes from Emerging
Markets to Frontier or Standalone Markets status as soon as
practicable, with sufficient lead time prior to implementation.
Market Accessibility issues in Sri Lanka, Kenya and
Bangladesh
Persistent market accessibility issues continue to impact a
number of Frontier Markets, adversely affecting the replicability
of the indexes. In Kenya, the queue for US dollars in the FX market
persists and continues to cause delays in foreign investors’
ability to repatriate capital. In addition, activity in the Sri
Lankan FX market continues to be limited amidst broader economic
issues affecting the country. In Bangladesh, the Bangladesh
Securities and Exchange Commission reinstituted price floors for
all securities listed on the stock exchanges in Bangladesh, leading
to a notable decline in trading liquidity. Therefore, MSCI will
continue to apply the special treatment for these markets to reduce
the number of potential changes in relevant indexes and mitigate
concerns on index replicability.
MSCI continues to welcome feedback on the accessibility of the
Sri Lankan, Kenyan and Bangladesh equity markets and may consult
with market participants in case of further developments.
Recent Developments in Securities’ Settlement Cycles
The alignment of settlement systems is critical for maintaining
the stability of securities markets and protecting investors'
assets. The transition to a shorter settlement cycle (T+1) can
bring numerous benefits such as enhanced investor protection, risk
reduction in the financial system, and increased operational and
capital efficiency while heightening resiliency in the securities
market. However, it is crucial that this shift does not introduce
inefficiencies, such as pre-funding requirements or additional
operational costs.
In Developed Markets, the US and Canada announced since 2021
their intention to migrate to a shorter settlement cycle from T+2
to T+1 and commenced coordinating efforts to develop an
implementation approach, considering the potential impacts and
risks. Earlier this year, both markets announced that the
transition to T+1 will take place in May 2024. As this change is
set to occur in the US and Canada, global alignment across
Developed Markets would be highly beneficial, especially during
global index rebalances, to reduce frictions and prevent
overdrafts, particularly considering current high interest rates.
An ideal scenario would involve a coordinated transition across
Developed Markets with the EU, UK and Japan following the shift.
Conversely, it is expected that Emerging Markets delay in
transitioning to T+1 until the lack of flexibility in amending
cycles and the requirement for pre-funding in certain markets is
addressed.
For instance, in 2023, India completed the transition from a T+2
to a T+1 settlement cycle for the equities segment. Initially,
market participants raised concerns that this change may result in
the need to pre-fund trades in order to reduce the settlement risk
and may create issues related to both trade confirmation timelines
and FX trading management. After operational amendments from the
Securities and Exchange Board of India (SEBI), international
institutional investors reported a transition to a shorter cycle,
with no issues.
MSCI continues to closely monitor these developments and
welcomes feedback from market participants on the shortening of the
settlement cycle in equity markets and the impact of
settlement-misalignment across different markets.
Upcoming changes to the MSCI Frontier Markets Indexes
In November 2022, MSCI announced the following changes to the
MSCI Frontier Market Indexes methodology: 1) Independent size
cutoffs for Frontier Markets that are no longer linked to Developed
Markets, 2) For each individual Frontier Market, a reduction in the
minimum number of companies required to meet Standard Index
requirements for Size and Liquidity from two companies to one, and
3) Regional consolidation of individual markets for the purpose of
index construction and maintenance where appropriate, starting with
the Baltic States, i.e., Estonia, Lithuania and Latvia. These
changes will be implemented in the MSCI Frontier Markets Indexes
starting from the August 2023 Index Review.
It should be noted that the MSCI 2024 Market Classification
Review will apply the new size cutoffs for Frontier Markets,
considering the Size and Liquidity requirements resulting from the
May 2024 Index Review.
-Ends-
About MSCI
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years of expertise in research, data and technology, we power
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