MSCI Inc. (NYSE: MXB), a leading provider of investment decision
support tools worldwide, announced today that there will be no
changes in market classification as part of the 2010 Annual Market
Classification Review. All countries that were considered for
potential reclassification will remain under review for the 2011
Annual Market Classification Review. MSCI also released today the
2010 Global Market Accessibility Review for each of the markets
under its coverage.
As a reminder, every June MSCI communicates its conclusions
following discussions with the investment community on the list of
countries under review and announces the new list of countries, if
any, under review for potential market reclassification in the
upcoming cycle. For the current cycle starting today, MSCI will
maintain on the review list the MSCI Korea and MSCI Taiwan Indices
for a potential reclassification to Developed Markets as well as
the MSCI Qatar and MSCI UAE Indices for a potential
reclassification to Emerging Markets. No other candidate will be
added to the list of country indices under review for potential
market reclassification. MSCI will communicate its decisions
resulting from this Annual Market Classification Review in June
2011.
Review of Markets in the Review List
1)
Korea: MSCI will maintain
the MSCI Korea Index in Emerging Markets. The MSCI Korea Index will
remain under review for a potential reclassification to Developed
Markets as part of the 2011 Annual Market Classification
Review.
Korea continues to meet most developed markets criteria of
the MSCI market classification framework, notably economic
development, market size and liquidity and many aspects of the
market operational framework are at the level of developed market
standards. However not all criteria are met and international
institutional investors continue to express concerns related to
certain important accessibility issues for Korea. Some changes have
come into effect over the last few years, but their impact remains
insufficient to meet developed market standards according to the
assessment of a number of market participants. For example, the
removal of the real demand principle has provided investors some
flexibility in the currency operations, but in the absence of an
active offshore market for the Korean won and with the limited
trading hours of the onshore spot currency market, investors are
still required to pre-fund their trades. The decision to abolish
restrictions on local banks to lend funds to international
investors for securities investments is a positive development
which will be tested by investors after it takes effect in November
2010. MSCI also hopes that the Korean authorities will
continue to focus their attention on improvements to the investor
accessibility issues linked to the rigidity of the ID system in
particular for the use of omnibus accounts, off-exchange block
trades and in-kind transfers. Finally anti-competitive
practices have not been eliminated: the provision of stock market
data continues to be subject to contractual anti-competitive
clauses. 2)
Taiwan: MSCI will maintain
the MSCI Taiwan Index in Emerging Markets. The MSCI Taiwan Index
will remain under review for a potential reclassification to
Developed Markets as part of the 2011 Annual Market Classification
Review.
Taiwan also meets many developed markets criteria, including
economic development and market size and liquidity. While by
several measures the Taiwanese market possesses the operational
characteristics of a developed market, major concerns by
international institutional investors, such as pre-funding
practices, lack of full currency convertibility and restrictions
associated with the Foreign Institutional Investors (FINI) ID
system, continue to be obstacles to the reclassification of the
MSCI Taiwan Index to the Developed Market status. Positive
steps have been achieved by regulators and the Taiwan Stock
Exchange in aligning to the international settlement standard with
the implementation of Taiwan’s T+2 delivery versus payment (DVP)
settlement model. Unfortunately, pre-funding practices continue to
be the norm due to the timing of settlement cycle on the T+2 day.
It also remains to be seen whether regulators will approve a
proposal for foreign institutional investors to be allowed to use
overnight overdraft facilities for settlement purposes. In
addition, significant progress in the areas of full convertibility
of the New Taiwan Dollar and restrictions associated with the
Foreign Institutional Investors (FINI) ID system is still required
by a number of international investors before they would support a
potential reclassification to developed markets. 3)
UAE: MSCI will maintain the
MSCI UAE Index within Frontier Markets. The MSCI UAE Index will
remain under review for a potential reclassification to Emerging
Markets as part of the 2011 Annual Market Classification
Review.
International institutional investors welcomed the recent
enhancements introduced by the Emirati regulator such as the
Regulation of Securities Custody Activities which had the positive
outcome of attracting new global custodians in the UAE. However,
the need to set up and operate with a dual account structure is
still a major concern to a number of international institutional
investors and is incompatible with general emerging markets
standards. International institutional investors often establish
segregated custody and trading accounts in order to mitigate the
risk from local brokers having unlimited access to the trading
accounts. This results in the significant operational burdens of
having to transfer shares from one account to the other prior to
trade. MSCI continues to be encouraged by the planned future
enhancements by the Emirati regulator such as the potential
increase of the foreign ownership limit levels imposed by Emirati
companies which would facilitate equal foreign access to the local
equity market and the potential introduction of a true delivery
versus payment (DVP) settlement model. While these future
enhancements were announced some time ago, the recent economic and
financial turmoil may have affected the speed of progress on this
front as well as opened a broader rethinking on the structure of
UAE stock exchanges. International institutional investors are
hopeful that these recent developments will not bring any further
delay in the implementation of the proposed enhancements. Investors
would also welcome a public roadmap from the regulator and the
exchanges providing visibility on the timetable of implementation
of these changes. 4)
Qatar: MSCI will maintain
the MSCI Qatar Index within Frontier Markets. The MSCI Qatar Index
will remain under review for a potential reclassification to
Emerging Markets as part of the 2011 Annual Market Classification
Review.
Similarly to the UAE, frequent use of dual account
structures, i.e., segregated custody and trading accounts, because
of unlimited access by local brokers to trading accounts remains an
issue that needs to be addressed for the market to meet emerging
markets standards. In addition, international investors remain
concerned about the stringent foreign ownership limits imposed on
Qatari companies. MSCI is encouraged by important
enhancements considered by the Qatar Exchange.
MSCI also notes that there have been several positive
developments in the Pakistani equity market over the last year and
that the market has returned to normal functioning since the
removal of the “floor rule” in late 2008. However, the current
Pakistani equity market is characterized by a very limited number
of sizeable securities as well as by a fragile financial and
institutional framework as highlighted by the 2008 crisis. As a
reminder, as an integral part of MSCI’s classification framework,
an upward migration can be considered only if the change is deemed
to be irreversible. In the specific case of the MSCI Pakistan
Index, a reclassification to the Emerging Market status could not
yet be considered irreversible as the resulting index would only
include three constituents marginally meeting the minimum size
requirements for Emerging Markets. Based on these considerations,
MSCI will not include the MSCI Pakistan Index in the review list
for potential reclassification to Emerging Markets as part of the
2011 Annual Market Classification Review but will continue to
monitor the market over the next year.
In light of the recent events impacting the Greek economy, MSCI
would like to clarify that no change is currently being considered
to the market classification status of the MSCI Greece Index. The
current Greek sovereign debt crisis has had no impact on the equity
market accessibility and investability.
MSCI continues to closely monitor the situation and should there
be any changes that may warrant a potential market
reclassification, MSCI would provide further public
communication.
Global Market Accessibility Review
MSCI released today its second Global Market Accessibility
Review, including a year on year comparison, on all the 76 markets
it covers and welcomes feedback from the investment community. The
Global Market Accessibility Review aims to reflect international
investors’ experience in investing in a given market and provides a
detailed assessment of market accessibility for each country market
included in the MSCI Indices. In particular, it provides an
evaluation of 18 measures in four market accessibility criteria,
which are:
- Openness to foreign
ownership
- Ease of capital inflows /
outflows
- Efficiency of the operational
framework
- Stability of the institutional
framework
These four criteria are reflective of the views of international
institutional investors, who generally put a strong emphasis on
equal treatment of investors, free flow of capital, cost of
investment and country specific risk.
The assessment is intended to serve as the basis for a
comparison of countries’ market accessibility levels across
investment universes. This review aims also to serve as a tool for
international institutional investors to better track the evolution
of market accessibility in individual countries as well as for
regulators to be informed of the areas perceived as not meeting
international standards and for which some improvements may be
welcomed.
While some regulatory or operational changes have resulted in
improved market accessibility in several markets around the world,
there have also been a few cases of changes in the opposite
direction. Notably, in Brazil a tax of 2% on foreign exchange
inflows related to the purchase of equities and fixed income
securities has been imposed. This is a costly measure that
introduces further discrimination between local and international
investors, albeit for the sake of avoiding an excessive
appreciation of the Brazilian Real.
MSCI also notes that some exchanges have persisted with the
unfortunate practice of imposing restrictive anti-competitive
clauses on their provision of stock market data. One example is the
insistence on prior approval by the exchange over index providers’
licenses of their own indices to financial product providers. These
practices are anti-competitive because they artificially limit
financial products that may be created and where they may be
traded, often to protect an exchange’s own listed products. These
licensing practices are a cause of concern for international
investors for two reasons. First, they distort the investment
process by limiting the flow of information and the choices
available to the international investment community and they are
inconsistent with the full development of open and liquid equity
markets, which is potentially harmful to both companies listed on
the exchange and investors. Second, the fact that an entity
operating a stock exchange under a government license is allowed
(whether actively or passively) to unduly restrict the use of price
data to protect its own separate business activities is a sign that
the regulatory framework is not robust. Protectionist restrictions
on the use of exchange price data of the kind described above are
inconsistent with prevailing developed market practices, and also
impact negatively the assessment of the market accessibility of
emerging and frontier markets.
The complete results of the 2010 Global Market Accessibility
Review, including the detailed assessment of the different market
accessibility measures by country, as well as additional
information on the MSCI Market Classification Framework and a
summary of recent market reclassifications can be found on MSCI’s
web site at
http://www.mscibarra.com/products/indices/international_equity_indices/mc.html.
###
MSCI will be holding a Press Conference Call following the
announcement to answer questions from the media:
Date: Monday June 21, 2010 Time: 5.45pm EDT/10.45pm BST/11.45pm
CEST
International Dial-In:
+1-210-795-1098
Pass Code: Market
Classification
Toll Free Numbers: US: 866-803-2143 Hong Kong:
800-900-592 UK: 0800-279-3953 Japan: 00531-12-1857
Please note that this press conference call is restricted to
journalists. Replays of this call will not be available.
Clients and other interested parties should contact MSCI Global
Client Service with any enquiries
###
About MSCI Inc.
MSCI Inc. is a leading provider of investment decision support
tools to investors globally, including asset managers, banks, hedge
funds and pension funds. MSCI products and services include
indices, portfolio risk and performance analytics, and governance
tools.
The company’s flagship product offerings are: the MSCI indices
which include over 120,000 daily indices covering more than 70
countries; Barra portfolio risk and performance analytics covering
global equity and fixed income markets; RiskMetrics market and
credit risk analytics; ISS out-sourced proxy research, voting and
vote reporting services; FEA valuation models and risk management
software for the energy and commodities markets; and CFRA forensic
accounting risk research, legal/regulatory risk assessment, and
due-diligence. MSCI is headquartered in New York, with research and
commercial offices around the world.
For further information on MSCI, please visit our web site
at www.msci.com
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