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MSCI 2023 Market Classification Review

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

MSCI is a leading provider of critical decision support tools and services for the global investment community. With over 50 years of expertise in research, data and technology, we power better investment decisions by enabling clients to understand and analyze key drivers of risk and return and confidently build more effective portfolios. We create industry-leading research-enhanced solutions that clients use to gain insight into and improve transparency across the investment process. To learn more, please visit www.msci.com.

This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCI Inc. or its subsidiaries (collectively, “MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the “Information Providers”) and is provided for informational purposes only. The Information may not be modified, reverse-engineered, reproduced or redisseminated in whole or in part without prior written permission from MSCI. All rights in the Information are reserved by MSCI and/or its Information Providers.

The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used to create indexes, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services.

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Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury results from the negligence or willful default of itself, its servants, agents or sub-contractors.

Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results.

The Information should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. All Information is impersonal and not tailored to the needs of any person, entity or group of persons.

None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy.

It is not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index. MSCI does not issue, sponsor, endorse, market, offer, review or otherwise express any opinion regarding any fund, ETF, derivative or other security, investment, financial product or trading strategy that is based on, linked to or seeks to provide an investment return related to the performance of any MSCI index (collectively, “Index Linked Investments”). MSCI makes no assurance that any Index Linked Investments will accurately track index performance or provide positive investment returns. MSCI Inc. is not an investment adviser or fiduciary and MSCI makes no representation regarding the advisability of investing in any Index Linked Investments.

Index returns do not represent the results of actual trading of investible assets/securities. MSCI maintains and calculates indexes, but does not manage actual assets. The calculation of indexes and index returns may deviate from the stated methodology. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments. The imposition of these fees and charges would cause the performance of an Index Linked Investment to be different than the MSCI index performance.

The Information may contain back tested data. Back-tested performance is not actual performance, but is hypothetical. There are frequently material differences between back tested performance results and actual results subsequently achieved by any investment strategy.

Constituents of MSCI equity indexes are listed companies, which are included in or excluded from the indexes according to the application of the relevant index methodologies. Accordingly, constituents in MSCI equity indexes may include MSCI Inc., clients of MSCI or suppliers to MSCI. Inclusion of a security within an MSCI index is not a recommendation by MSCI to buy, sell, or hold such security, nor is it considered to be investment advice.

Data and information produced by various affiliates of MSCI Inc., including MSCI ESG Research LLC and Barra LLC, may be used in calculating certain MSCI indexes. More information can be found in the relevant index methodologies on www.msci.com.

MSCI receives compensation in connection with licensing its indexes to third parties. MSCI Inc.’s revenue includes fees based on assets in Index Linked Investments. Information can be found in MSCI Inc.’s company filings on the Investor Relations section of msci.com.

MSCI ESG Research LLC is a Registered Investment Adviser under the Investment Advisers Act of 1940 and a subsidiary of MSCI Inc. Neither MSCI nor any of its products or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and MSCI’s products or services are not a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, provided that applicable products or services from MSCI ESG Research may constitute investment advice. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. MSCI ESG and climate ratings, research and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG Indexes, Analytics and Real Estate are products of MSCI Inc. that utilize information from MSCI ESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK).

Please note that the issuers mentioned in MSCI ESG Research materials sometimes have commercial relationships with MSCI ESG Research and/or MSCI Inc. (collectively, “MSCI”) and that these relationships create potential conflicts of interest. In some cases, the issuers or their affiliates purchase research or other products or services from one or more MSCI affiliates. In other cases, MSCI ESG Research rates financial products such as mutual funds or ETFs that are managed by MSCI’s clients or their affiliates, or are based on MSCI Inc. Indexes. In addition, constituents in MSCI Inc. equity indexes include companies that subscribe to MSCI products or services. In some cases, MSCI clients pay fees based in whole or part on the assets they manage. MSCI ESG Research has taken a number of steps to mitigate potential conflicts of interest and safeguard the integrity and independence of its research and ratings. More information about these conflict mitigation measures is available in our Form ADV, available at https://adviserinfo.sec.gov/firm/summary/169222.

Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, IPD and other MSCI brands and product names are the trademarks, service marks, or registered trademarks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P Global Market Intelligence. “Global Industry Classification Standard (GICS)” is a service mark of MSCI and S&P Global Market Intelligence.

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