Market consultation

FTSE Russell Consultation on theTreatment of Suspensions

Important Information
The proposals set out in this consultation document are included in order to gather feedback andmay or may not result in changes to FTSE Russell Index rules.

ftserussell.com

January 2018

FTSE Russell Consultation on the Treatment ofSuspensions
Responding to the Consultation
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/5C6KPP8
If you have any questions about this survey, or if you encounter any technical issues, please contact
rpawson@FTSERussell.com.

Introduction
The presence of suspended constituents in an equity index can create tracking difficulties for investment
firms managing passive funds and ETFs, particularly in the presence of significant cash flows. Accordingly,
index providers will typically delete suspended constituents from their indexes after some specified time
period. However, the timing of the deletion, and the price at which the deletion takes place, can cause
problems in their own right. The difficulties are exacerbated if the investment manager is using swaps orother derivatives to obtain the requisite exposure.
Suspensions are uncommon in the majority of stock exchanges that are included in the FTSE Global Equity
Index Series (GEIS) and historically stock suspensions have not proved unduly problematic for users of that
series. Those suspensions that do occur tend to do so as part of the delisting process, as a result of capital
restructuring or because of particular corporate events such as equity issuance. However, stock
suspensions are far more common in China. As China has recently increased access to its equity markets
for international investors and is now being considered for inclusion as an emerging market in global stock
market indexes, the formulation of an appropriate stock suspension policy has assumed increased
importance.
The importance of the issue is demonstrated when comparing the FTSE Global All Cap Index and the FTSE
China A All Cap Index. On 29 September 2017, only 17 of the 7,796 constituents in the FTSE Global All
Cap Index were suspended, two of which were China P-chips and one a China H-share. Four of the 17 hadbeen suspended for over 80 business days; two of these were P-chips. In contrast, for the FTSE China A All
Cap Index, 91 of the 1,916 constituents were suspended on the same day and 28 had been suspended forover 80 business days. Appendix A provides further analysis of stock suspensions in China including thepotential reasons for the propensity of Chinese securities to effectively self-suspend and the regulatory
initiatives which have been taken to reduce that trend.

FTSE Russell | Suspension treatments – January 20182

This consultation paper details FTSE Russell’s existing rule for the treatment of suspended companies anddescribes how the rule was formulated. It then provides a series of questions to establish whether further
enhancements might be made.

Current Rule on Suspended Companies
The intention of the FTSE Russell suspension policy is to remove those companies that can no longer betracked, and to provide transparency around how long suspended companies will remain in FTSE Russell
indexes and the price and date at which suspended companies will be removed.
A summary of the suspension rule is provided below. For full details please refer to section 4.18 of the
Corporate Actions and Events Guide.














If a constituent is declared bankrupt without any indication of compensation to shareholders, the last
traded price will be adjusted down to zero value and it will subsequently be removed from the index
with T+2 notice.
In all other cases, the constituent will continue to be included in the index for a period of up to 20
business days at its last traded price.
If the constituent continues to be suspended at the end of that period, it will be subject to review anda decision will be taken to either allow the constituent to remain in the index for a further period of up
to 20 business days or to remove it at zero value. In making this determination, FTSE Russell willtake into account the stated reasons for the suspension. These reasons may include
announcements made by the company regarding a pending acquisition or restructuring, and any
stated intentions regarding a date for the resumption of trading.
This procedure will be repeated at successive 20 business day intervals thereafter until either trading
recommences or the suspension period reaches 80 business days.
If the suspension period reaches 80 business days, FTSE Russell will provide notice that theconstituent will be removed at zero value at the index review immediately following the expiry of aminimum 40 business day notice period.
In certain limited circumstances where the index weight of the constituent is significant and FTSE
Russell determines that a market-related value can be established for the suspended constituent, forexample because similar company securities continue to trade, deletion may take place at themarket-related value instead. In such circumstances, FTSE Russell will set out its rationale for the
proposed treatment of the constituent at the end of the 80 business day period.
If following the end of the 80 business day period, a suspended constituent resumes trading before
the Wednesday before the first Friday of March, June, September or December, the deletion notice
will be rescinded and the constituent will be retained in the index. If the constituent resumes trading
after these dates but before the review effective date, the constituent will continue to be removed
from the index as previously announced but in these circumstances the deletion may instead be
implemented at market value.
If a constituent has been removed from the index and trading is subsequently restored, theconstituent will only be re-considered for inclusion after a period of 12 months from its deletion. For
the purposes of index eligibility it will be treated as a new issue.

Background to the Current Rule
FTSE Russell suspension policies have evolved over time as listing regulations have changed, additional
markets have been added to the global equity indexes and in order to support the differing requirementsfrom both buy-side and sell-side investors.
The impact of China A-share suspensions on FTSE Russell indexes and its clients in 2015 led to a change inpolicy on how suspensions were treated. Prior to 2015, the suspension policy excluded constituents fromthe index if they were declared bankrupt or in the process of delisting. Suspended companies that were
undergoing restructuring or pending acquisition would remain in the index and be reviewed for eligibility on a

FTSE Russell | Suspension treatments – January 20183

rolling 20 business day basis. In practice, suspended companies were rarely removed as a result of anactive decision and could remain in the index for extended periods. From 21 December 2015, thesuspension policy changed to limit the amount of time a suspended company could be retained in the index.
In formulating the current rule, FTSE Russell consulted extensively with market participants including market
makers and users of the FTSE China A50 index. ETF product providers were generally in favour of retaining
a suspended stock in the index for a maximum of 80 days, deleting it thereafter as any large suspended
constituent made the basket creation and redemption process difficult to manage. It was also noted thatwhilst deletion at zero price might be preferred by long only managers, the opposite was true for swap
counterparties providing P-notes to synthetic ETFs.
Although deleting a constituent at fair value rather than zero would mitigate the pricing risk incurred by Pnote issuers, it was accepted that in most cases it would be difficult to get a consensus on fair value andtherefore would be applied in very limited circumstances. China Vanke was such an example: the tradeable
H-share was used as a proxy valuation for the suspended A-share (see the text box in Appendix A).
The 80 business day monitoring period during which a suspended security is retained in the index wasdeemed appropriate to allow for the complexity of any restructuring activity which might delay a resumptionof trading. However, in the event of a confirmed deletion, market participants, including those using FTSE
China A50 swaps and other derivatives, advised of a requirement for adequate notice of deletion so that they
could adjust their positions and so manage their risk. Those adjustments could well take place over several
days, and this observation informed the choice of a minimum 40 business day notice period to deletion.
However, if the deletion decision were subsequently to be reversed, for example because the constituent
announced it would resume trading, those adjustments would need to be unwound. In order to provide
sufficient time for that process to be completed, the rule further stipulates that a deletion decision would only
be rescinded where resumption of trading occurs before the Wednesday before the first Friday of March,June, September or December,This Consultation
Given the regulatory initiatives surrounding suspended stocks in China, and the tendency for ETFs based on
China indexes to move away from synthetic (P-note) exposure, FTSE Russell would like to consult index
users on whether the rationale underlying the current suspension rule remains valid, including whether the
80 day hard suspension limit remains appropriate and whether extended notice before a stock is removed
from an index is still required. In addition, the consultation takes the opportunity to solicit feedback fromindex users on a current topic of debate: whether to render ineligible companies that have recently beensuspended for an extended period but which have recommenced trading prior to a forthcoming index review.

FTSE Russell | Suspension treatments – January 20184

Consultation Questions
The following questions relate to the current FTSE Russell suspension policy, but also include potentialchanges/ enhancements. Please refer to Appendix A for analysis of Chinese stock suspensions.

1. What is the maximum number of days that a company should be allowed to remain suspended ina FTSE Russell index before a notice is published stating that the company will be removed?

☐ A. 20 days
☐ B. 40 days
☐ C. 60 days
☐ D. 80 days
☐ E. A company should only be excluded if it is in the process of being delisted☐ F. Other
If ‘Other’ is selected please provide any comments in the box below:

2. When publishing a notice stating a company will be removed for reasons other than bankruptcy(where the rules prescribe T+2 notice), how much notice should FTSE Russell provide to market
participants before the exclusion is effective?

☐ A. 5 days
☐ B. 10 days
☐ C. 20 days
☐ D. 40 days
☐ E. Other
If ‘Other’ is selected please provide any comments in the box below:

FTSE Russell | Suspension treatments – January 20185

3. Subject to the provision of the notice period in Question 2, when should FTSE Russell exclude
the suspended company?

☐ A. At the next index review☐ B. At the expiry of the notice period☐ C. Other
If ‘Other’ is selected please provide any comments in the box below:

4. If FTSE Russell announces the removal of a suspended company from an index at the next
review (option A in question 3), but prior to being removed the company resumes trading, should
the company remain a constituent of an index?

☐ A. Yes, providing the company resumes trading before the review announcement date (i.e. theWednesday before the first Friday of March, June, September and December)☐ B. Yes, providing the company resumes trading before the review implementation week (i.e. it
resumes trading in advance of the Monday before the third Friday of March, June, September
and December)☐ C. No, after FTSE Russell announces its deletion, the company should be removed regardless ofwhether it resumes trading☐ D. Other
If ‘Other’ is selected please provide any comments in the box below:

5. If FTSE Russell announces the removal of a suspended company from an index at expiry of thenotice period from question 2 (option B in question 3), but prior to it being removed the company
resumes trading, should the company remain a constituent of an index?

☐ A. Yes, providing the company resumes trading two days ahead of the expiry of the notice period☐ B. Yes, providing the company resumes trading five days ahead of the expiry of the notice period☐ C. No, after FTSE Russell announces its deletion, the company should be removed regardless ofwhether it resumes trading☐ D. Other
If ‘Other’ is selected please provide any comments in the box below:

FTSE Russell | Suspension treatments – January 2018

6

6. When a suspended company is removed from a FTSE Russell index and subsequently resumes
trading, how long a period should pass after the resumption of trading before the company isagain considered eligible for inclusion at a subsequent index review?

☐ A. Three months (this is the minimum period of trading data required to ascertain eligibility in GEIS)☐ B. Six months☐ C. Twelve months☐ D. Other
If ‘Other’ is selected please provide any comments in the box below:

7. Should FTSE Russell exclude non-constituent companies as part of the review process when
they have previously been suspended for a set number of days? Please refer to Appendix B for
analysis of future suspension probabilities.

☐ A. Yes, companies should be excluded from an index if they have previously been suspended for a
set number of days regardless of passing the standard eligibility criteria☐ B. No, companies that have been suspended in the past should be eligible providing they pass thestandard eligibility criteria☐ C. Other comments
If ‘Other’ is selected please provide any comments in the box below:

8. If you answered ‘Yes’ to question 7 (option A), for how many days should a company besuspended before it should be considered as ineligible for index inclusion?

☐ A. Suspended for at least 20 business days in the 12 month period prior to a review☐ B. Suspended for at least 80 business days in the12 month period prior to a review☐ C. Some other period
If ‘Other’ is selected please provide any comments in the box below:

FTSE Russell | Suspension treatments – January 20187

9. Any further comments?
Any further comments can be included in the box below:

FTSE Russell | Suspension treatments – January 20188

Appendix A
China A-share Suspensions
In China the suspension of trading rule allows companies listed on the domestic stock exchanges to apply
for a trading halt (hereinafter used interchangeably with suspension). The reasons for a company to seeksuspension include:
a)
b)
c)
d)

undergoing or planning to undergo a major asset restructuring;
having a significant event to disclose;
having an abnormal fluctuation of share price or trading volume, andbeing unable to release financial reporting on time.

The suspension mechanism, which was originally intended to facilitate information disclosure and prevent
excessive speculation, has historically led to frequent suspensions. In certain circumstances the number ofsuspensions can increase dramatically.
Figure 1 shows the absolute number and the percentage of constituents suspended in the FTSE China A All
Cap Index from 4 January 2007 to 29 September 2017. On average, 5% of the constituents by number (4%by index weight) have been suspended on a daily basis. At its peak on 9 July 2015, 669 out of the 1,424
constituents (47% by constituent number or 33% by index weight) were suspended.

1000

50%

900

45%

800

40%

700

35%

600

30%

500

25%

400

20%

300

15%

200

10%

100

5%

0
Jan'07

Percentage of Constituents Suspensions

Number of Suspensions

Figure 1: Absolute and percentage number of suspensions in the FTSE China A All Cap Index

0%
Jan'08Jan'09Jan'10

Jan'11

Jan'12Absolute Number of Constituents Suspended (LHS)

Jan'13

Jan'14Jan'15Jan'16

Jan'17% Number of Constituents Suspended (RHS)

Source: FTSE Russell, WIND, data as at 29 September 2017.

FTSE Russell | Suspension treatments – January 20189

Suspension Example: China Vanke
Although there are general guidelines on the length of a suspension depending on the scenario chosen,
in practice the suspension period can be determined by the listed companies themselves. As an
example, China Vanke, one of the largest property companies in China, applied to Shenzhen Stock
Exchange for a trading halt of its A-shares from the afternoon of 18 December 2015 on the grounds thatthe company was planning a major asset restructuring.
On 21 December 2015, the company issued a suspension notice, stating it expected to disclose therestructuring details within 30 calendar days. The company subsequently issued weekly notices on the
progress of the restructuring, with little new information being provided.
On 16 January 2016, the company announced that it had applied for a continuation of its suspension
due to the complexity of the restructuring.
It was not until 14 March 2016 that the company disclosed further information including a memorandumof understanding. However, on 18 March 2016 the company announced that owing to its undergoing amajor asset restructuring, its A-shares would continue to be suspended until a future date set to be nolater than 18 June 2016.
On 18 June 2016 the company issued an indicative notice, stating that the resumption of trading in its Ashares would be postponed and disclosing its plan to acquire assets by issuing new shares.
On 2 July 2016 the company announced that it had replied to an enquiry from the Shenzhen Stock
Exchange regarding the restructuring and that it had applied for trading in its A-shares to be resumed on
4 July 2016.
In total, the A-shares of China Vanke were suspended for 131 days during this corporate event.
It is worth noting that the H-shares of China Vanke that are listed on the Hong Kong Stock Exchange
were suspended on the same date as the A-shares. On 5 January 2016 the company announced that it
had made an application for resumption of trading in its H-shares. The H-shares resumed trading thefollowing day, after having been suspended for 12 days, and remained active during the suspension
period of its A-shares. This reflects the difference in regulatory requirements, even for similar securitiesof the same company.

The example above not only highlights the length of time a suspension can last, but also the limited
information that might be made available. Many corporate events provide limited information and included
statements such as ‘significant asset reorganization’, ‘planning for significant event’, ‘discussing a significant
issue’ or ‘shareholding plan for staff’ with little information around the resolution of the event. Therefore, it
becomes difficult for investors to determine for how long companies will remain suspended.

Changes in Suspension Regulations
To maintain market order and protect investors’ rights, the Chinese authorities have sought to improve themanagement of trading suspensions. In May 2016, the Shanghai and Shenzhen Stock Exchanges bothannounced regulatory changes intended to limit share trading suspensions to three months for companies
involved in major asset restructuring. The Shanghai Stock Exchange further stipulated that the cumulativesuspension period could not exceed five months for companies planning a major asset restructuring, while
the Shenzhen Stock Exchange required the maximum suspension period to be six months for all types of
events. In September 2016, the China Securities Regulatory Commission (CSRC) tightened the policy
regarding major asset restructurings by requiring listed companies to state in their restructuring plan whether
they had obtained the necessary licence or written approval from the relevant authority. In September 2017,

FTSE Russell | Suspension treatments – January 201810

the CSRC simplified the disclosure requirements so as to further shorten the suspension time arising from amajor asset restructuring.
As can be seen in Figure 2, the percentage of constituents suspended in the FTSE China A All Cap Index
has fallen dramatically since its peak in July 2015, especially with regard to suspensions of less than 20
days. However, there is no clear trend for companies suspending for over 20 days, even after the
implementation of the regulatory changes since May 2016.

Figure 2: % number of constituents suspended for different ranges of days in the FTSE China A All Cap
Index
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jan'07Jan'08Jan'09Jan'10

Jan'11

1 to 20

21 to 40

Jan'12

Jan'1341 to 60

Jan'1461 to 80

Jan'15Jan'16

Jan'17over 80

Source: FTSE Russell, WIND, data as at 29 September 2017.

Figure 3 shows the number of constituents suspended for different ranges of days in the FTSE China A All
Cap Index as of 29 September 2017. In total there were 91 out of the 1,916 constituents suspended, 28 ofwhich had been suspended for over 80 business days. In contrast, on the same day, only 17 out of the
7,796 constituents in the FTSE Global All Cap Index were suspended, four of which had been suspended forover 80 business days.

FTSE Russell | Suspension treatments – January 201811

Figure 3: Number of constituents suspended in the FTSE China A All Cap Index as of 29 September 2017

35
30

Number of Constituents

30

28

25
20

17

15
10
10
6
5
0
1 to 20

21 to 40

41 to 60

61 to 80over 80

Day ranges

Source: FTSE Russell, WIND, data as at 29 September 2017.

FTSE Russell | Suspension treatments – January 201812

Appendix B
Should companies be excluded from indexes based on their past suspension record?
To assess whether a company’s past suspension record is correlated with its future propensity to suspend,
we analysed the trading (non-suspended) constituents of the FTSE China A All Cap Index that resulted froma September semi-annual review (as of the third Friday of the review month). These companies weredivided into two groups: Group 1 contained those companies suspended for fewer than 20 consecutive
business days in the past year ending on the third Friday, and Group 2 contained those suspended for 20
consecutive business days or more in the same period. For each group, the future suspension probability
was calculated as the number of constituents suspended for 20 consecutive business days or more in thenext one year divided by the total number of constituents in the group. A scenario of 20 days was selected
as it represents a reasonable suspension period, but also has one of the highest probability profiles.
Figure 4 shows the results of the suspension probability analysis from 2007 to 2016.
Figure 4: Suspension probability analysis in the FTSE China A All Cap Index
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Sep'07

Sep'08

Sep'09Sep'10

Sep'11

Suspension Probability in Group 1

Sep'12

Sep'13

Sep'14

Sep'15

Sep'16

Suspension Probability in Group 2

Source: FTSE Russell, WIND, data as at 29 September 2017.

The analysis shows that during the majority of the periods tested, the suspension probability in Group 2 washigher than that in Group 1. From a statistical perspective (using a paired t-test), it was found that thesuspension probability in Group 2 on average was relatively higher at a 95% confidence level. However,from a practical perspective, whether a previous track record of suspensions is a significant indicator of
future suspensions is not conclusive. For example, in 2016 the probability of being suspended again in thefollowing twelve months indicated that for every 23 companies suspended another 77 were not.
Further studies were conducted using 40, 60 and 80 day suspension periods. Although the results were notas strong as with 20 days, the average suspension probability between Group 1 and Group 2 wasstatistically different only in the case of 40 days.
The analysis leads to the conclusion that a previous track record of suspensions does not in itself provide
sufficient evidence to exclude a company from the index. However, using such a test as an exclusion
criterion might still potentially act as a deterrent to potential index constituents and so discourage futuresuspensions.

FTSE Russell | Suspension treatments – January 201813

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