CONSULTATION TO ADDRESSCONTINUOUS LISTING STANDARDSFOR US LISTED EXCHANGE TRADEDPRODUCTS

July 2017© 2017 MSCI Inc. All rights reserved.

SUMMARY AND BACKGROUND
Until now, US-listed exchange traded products (ETPs) have only been required to comply with listing standards
at the time of initial listing.
 A rule change, driven by the Securities and Exchange Commission, has now stated that “…for exchange
listing standards to effectively achieve their goals, including to effectively address the potential for
manipulation of a listed ETP, their application cannot be linked to only a single point in time (i.e., the timeof initial listing).” As a result, effective October 1, 2017, US exchanges (which include NYSE/ARCA, CBOE/BATS and NASDAQ)
will introduce rules that require ETP portfolios to meet the same initial listing standards on a continual andongoing basis as well.
 MSCI opens a consultation on a proposal to address compliance with the continuous listing standards for
US ETPs through a new index methodology.
 The methodology can be implemented as an ‘overlay’ to a pre-existing parent or capped index underlyingan ETP, and would aim to remediate any non-compliance of the underlying index on a daily basis.
 MSCI welcomes feedback on the consultation and will announce the results of the consultation on or
before August 4, 2017.
 This consultation may or may not lead to the adoption of any or all proposals contained in thispresentation.
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OVERVIEW OF CONTINUOUS LISTING STANDARDS
Listing Standard

International/Global **Domestic *Minimum market cap of component stocks that accountfor at least 90% of index weight

$100M

$75M

Minimum liquidity of component stocks that account forat least 70% of index weight

Minimum monthly trading volume of 250,000 shares orminimum notional volume traded per month of$25,000,000 averaged over the last six months

Maximum weight of top component stock

25%

30%

Maximum aggregate weight of top 5 component stocks

60%

65%

Minimum number of component stocks

2013*A domestic ETF is an ETF that includes only “U.S. Component Stocks”, which are equity securities that are registered under Sections 12(b) or 12(g) of the 1934 Act or American
Depositary Receipts, the underlying equity security of which is registered under Sections 12(b) or 12(g) of the 1934 Act.
**A global or international ETF is an ETF that consists of either (a) only Non-U.S. Component Stocks or (b) both U.S. Component Stocks and Non-U.S. Component Stocks. A "Non-U.S.
Component Stock" is an equity security that is not registered under Sections 12(b) or 12(g) of the 1934 Act and that is issued by an entity that (a) is not organized, domiciled orincorporated in the United States, and (b) is an operating company (including REITS and income trusts, but excluding investment trusts, unit trusts, mutual funds, and derivatives).

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ENFORCEMENT OF LISTING STANDARDS While the SEC was the impetus to suggest, and then later approve the changes in listing
standard enforcement, the implementation and oversight of the standards will be owned
and defined at the respective US exchange level.

 The exchanges are generally aligned on how they will enforce compliance with thestandards and have stated explicitly that the onus is on the ETP issuer to comply. In
addition to reliance on issuer notification, the exchanges will employ a system of monitoringfor potential non-compliance.
 If a product is deemed to be non-compliant post October 1, 2017, the product will be givena ‘BC’ (Below Compliance) designation within a few days after notification to the issuer.
This timing may vary across exchanges and the designation, once given, will be made public.
 After a time period allowed for the issuer to submit a proposal to address the noncompliance (45 days), remediation of the non-compliance can be executed during a
respective ‘cure’ period (usually 180 days), before a delisting process would commence.
 There is a slight differentiation between the continuous listing standards present for
global/international ETFs and for domestic ETFs.
4US CONTINUOUS LISTING STANDARDS: MSCI INDEX METHODOLOGY PROPOSAL

Underlying Indexes

Any MSCI Index and/or MSCI Capped Index Methodology

Index Construction Method

Optimization (constraints are listing standards)

Rebalance Frequency

Daily/EOD check for non-complianceIndex Compliance Priority (QIR)

Prioritization given to regulation driven (‘Listing Standards’; Capped(i.e. 25/50)) index methodologies

Index Compliance Priority (non-QIR)

Prioritization given to ‘Listing Standards’ Methodology

Tracking Error (QIR/non-QIR)At QIR, TE minimized to underlying index
At non-QIR, TE minimized to index itself

Turnover Budget

10%Minimum Constituent Weight

Smallest constituent weight in underlying index post optimization
equal to smallest weight pre optimization.

Constraint Rebalance Buffers

10% relative to constraints (listing standards)

Constraint non-compliance remediation

Weighting Adjustments or ad-hoc rebalance to parent index ifconstituents fall below minimum number. If an additional
constituent is needed for index compliance during a non-QIR
rebalance, that security will only be added to the ‘overlay’ versionof the index; not the underlying MSCI capped or parent index.
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INDEX SIMULATIONS
An historical month-end (July 2015-April 2017) stress test was run on the indexes noted below to gauge the frequency ofcompliance breaches and to test the efficacy of the methodological framework for ongoing remediation of any index noncompliance.
•MSCI Taiwan 25/50 Index•

MSCI US Investable Market Telecom Services 25/50 Index•MSCI USA IMI Telecom Services 25/50 Index•MSCI South Africa Index•

MSCI Korea 25/50 Index

Summary of Findings Over the time period examined for all indexes, the number of non-compliance incidents was relatively small (11).
The Korea and Taiwan Indexes had no occurrences of non-compliance during the time period that was reviewed.
 The breaches occurred within the concentration related listing standards. The market cap, liquidity related, andminimum constituency standards were never breached.
 Ex-ante Turnover and Tracking error varied depending on the extent of the breach, but never exceeded 3.0% and0.33% respectively during the re-optimization to bring the index back into compliance with the listing standards.
NOTE: The stress tests were executed with some exceptions to the proposed methodology. Most notably monthly data
was used for liquidity rather than trailing 6 month averages, and global/international standards were used universallyacross all indexes.
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INDEX SIMULATION-MSCI SOUTH AFRICA INDEX

Listing Standard# of breachoccurrences(Jul 2015-Apr2017)

Minimum market
cap0

Max weight-topstock5

Max weight- top 5stocks

0

Min number ofstocks0Min Liquidity0Date (s)of breach occurrence(s)June 2016
Sept 2016
Oct 2016
Nov 2016
April 2017

Index Turnover (%) toregain full compliance

.89%
.88%
.99%
.39%
.97%

Tracking Error(to non-compliant portfolio)

.22%
.22%
.25%
.09%
.21%

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INDEX SIMULATION-MSCI US INVESTABLE MARKET TELECOM SERVICES 25/50 INDEX

Date (s)of breach occurrence(s)Index Turnover (%) toregain full complianceTracking Error(to non-compliant portfolio)

Listing Standard# of breachoccurrences(Jul 2015-Apr2017)

Minimum marketcap0

Max weight-topstock

1

August 2015

1.36%.19%

Max weight- top 5stocks

3

August 2015
January 2016
February 2016

1.36%.72%
3.01%.19%.08%.33%

Min number ofstocks

0Min Liquidity

08INDEX SIMULATION-MSCI USA IMI TELECOM SERVICES 25/50 INDEX

Date (s)of breach occurrence(s)Index Turnover (%) toregain full complianceTracking Error(to non-compliantportfolio)

Listing Standard# of breachoccurrences(Jul 2015-Apr2017)

Minimum market
cap

0

Max weight-topstock

1

August 2015

1.01%.14%

Max weight- top 5stocks

1

February 2016

1.62%.18%

Min number ofstocks

0Min Liquidity

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DISCUSSION POINTS Does the proposed index methodology present a sufficient solution tofacilitate compliance to the continuous listing standards?
 Would you consider the methodology ‘overlay’ a material change in theunderlying index for the ETP? What level of change constitutes materiality?
 Would you look to employ the index methodology selectively as an ETP
approached non-compliance of one or more of the listing standards?
-or Would this be proactively implemented across all indexes underlying ETPs
prior to the effective date (October 1, 2017) of continuous listing standard
enforcement?
 Would you look to have the methodology as a part of any indexes that werethe basis of US listed ETPs at launch?
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For more information, visit us at www.msci.com.

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