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MSCI Standard Index Series Methodology
Index Construction Objectives, Guiding Principles and Methodology for the MSCI Standard
Equity Index Series
Last Updated in November 2007

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Standard Index Series Methodology|November 2007

Notice and Disclaimer
Copyright © 2007. All rights reserved.
This document and all of the information contained in it, including all text, data, graphs, charts and all other information(collectively, the “Information”) may not be reproduced or redisseminated in whole or in part without prior written permission
from Morgan Stanley Capital International Inc. (“MSCI”). Any use of MSCI indices, data or other information requires alicense from MSCI. The Information is for informational purposes only and does not form a part of the terms or conditions of
any agreement you have or may enter into with MSCI. The Information may not be used to verify or correct other data, tocreate indices, or in connection with offering, sponsoring, managing or marketing any securities, portfolios, financial
instruments or products. None of the Information constitutes an offer to buy or sell, or a promotion or recommendation of,any security, financial instrument or product or trading strategy, and MSCI does not endorse, approve or otherwise express any
opinion regarding any issuer, securities, financial products or instruments or trading strategies that may be described or
mentioned herein. Further, none of the Information is intended to constitute investment advice or a recommendation to make(or refrain from making) any kind of investment decision and may not be relied on as such. The user of the Information
assumes the entire risk of any use it may make or permit to be made of it. NEITHER MSCI, ANY OF ITS AFFILIATES ORANY OTHER THIRD PARTY INVOLVED IN MAKING OR COMPILING ANY OF THE INFORMATION MAKES
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Morgan Stanley Capital International, MSCI, ACWI, EAFE, and all other MSCI Barra service marks referred to herein are theexclusive property of MSCI, Barra, Inc. or their affiliates, except that the Global Industry Classification Standard (GICS®) was
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About MSCI Barra
MSCI Barra (www.msci.com) develops and maintains equity, fixed income, multi-asset class, REIT and hedge fund indices thatserve as the benchmark for an estimated USD 3 trillion on a worldwide basis. MSCI is headquartered in New York, withresearch and commercial offices around the world. In 2004, MSCI acquired Barra, Inc. (www.barra.com), a global leader indelivering risk analytics, performance measurement and attribution systems and services to managers of portfolio and firm-wide
investment risk. Morgan Stanley, a global financial services firm and a market leader in securities, asset management, and credit
services, is the majority shareholder in MSCI, and Capital Group International, Inc. is the minority shareholder.

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Standard Index Series Methodology|November 2007

Table of Contents
Introduction ....................................................................................................................................... - 5 Executive Summary ........................................................................................................................... - 6 Section 1: Equity Index Construction Objectives and Guiding Principles....................................... - 7 1.1
PURPOSE AND OBJECTIVES .................................................................................................................................. - 7 1.2 GUIDING PRINCIPLES .......................................................................................................................................... - 7 1.2.1
Broad and Fair Market Representation......................................................................................................- 7 1.2.2
Investability and Replicability....................................................................................................................- 8 1.2.3
Consistency of Approach............................................................................................................................- 8 1.2.4
Continuity and Index Turnover..................................................................................................................- 8 1.2.5
Disciplined Approach: Principles, Rules and Guidelines ..........................................................................- 8 1.2.6
Transparency..............................................................................................................................................- 9 1.2.7
Independence and Objectivity ...................................................................................................................- 9 -Section 2: Constructing the MSCI Standard Index Series................................................................- 10 2.1 DEFINING THE EQUITY UNIVERSE .................................................................................................................... - 10 2.2 ADJUSTING THE TOTAL MARKET CAPITALIZATION OF SECURITIES IN THE UNIVERSE FOR FREE FLOAT ......... - 10 2.2.1
Defining and Estimating Free Float ........................................................................................................ - 11 2.2.1.1
2.2.1.2

2.2.2

2.2.2.1
2.2.2.2
2.2.2.3
2.2.2.4

Securities Not Subject to Foreign Ownership Limits (FOLs)................................................................................................... - 11 Securities Subject to FOLs.............................................................................................................................................................. - 11 -Assigning a Free Float-Adjustment Factor .............................................................................................. - 12 Securities with Free Float Greater Than 15% and Not Subject to FOLs................................................................................ - 12 Securities with Free Float Less than 15% and Not Subject to FOLs....................................................................................... - 12 Securities Subject to FOLs.............................................................................................................................................................. - 12 Securities Affected by Other Foreign Investment Restrictions................................................................................................. - 12 -2.2.3.
Calculating the Free Float-Adjusted Market Capitalization .................................................................... - 12 2.3 CLASSIFYING SECURITIES UNDER THE GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS) ...................... - 13 2.3.1
Structure of the Global Industry Classification Standard (GICS)............................................................. - 14 2.3.2
Industry Classification of Companies under the GICS ............................................................................ - 14 2.4 SELECTING SECURITIES FOR INDEX INCLUSION ................................................................................................ - 14 2.4.1
Index Constituent Eligibility Rules and Guidelines ................................................................................ - 15 2.4.1.1
2.4.1.2
2.4.1.3
2.4.1.4

2.4.2

Minimum Size Guidelines ............................................................................................................................................................... - 15 Liquidity ............................................................................................................................................................................................. - 15 Companies and Securities with a FIF less than 0.15 ................................................................................................................... - 16 Foreign Room................................................................................................................................................................................... - 16 -Target Representation.............................................................................................................................. - 17 -2.4.2.1
2.4.2.2
2.4.2.3.
2.4.2.4
2.4.2.5

Target Representation at Various Industry Levels ...................................................................................................................... - 17 Over- and Under-Representation .................................................................................................................................................. - 17 Security Size and Target Market Representation ......................................................................................................................... - 18 Number of Constituents and Industry Representation .............................................................................................................. - 19 Industry Representation: A Summary ........................................................................................................................................... - 19 -Section 3: Maintaining the MSCI Standard Index Series.................................................................- 21 3.1 ANNUAL FULL COUNTRY INDEX REVIEW IN MAY ............................................................................................. - 22 3.1.1
Annual Full Country Index Review Changes in Constituents..................................................................- 22 3.1.2
Annual Full Country Index Review Changes in Foreign Inclusion Factors (FIFs) .................................- 22 3.1.3
Annual Full Country Index Review Frequency and Timing ....................................................................- 22 3.2 QUARTERLY INDEX REVIEW .............................................................................................................................. - 22 3.2.1
Quarterly Index Review Changes in Constituents ...................................................................................- 23 3.2.2
Quarterly Index Review Changes in FIFs................................................................................................- 23 -MSCI Barra Index Research© 2007 MSCI Barra. All rights reserved
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Standard Index Series Methodology|November 2007
3.2.3
Quarterly Index Review Changes in Number of Shares ..........................................................................- 24 3.2.4
Quarterly Index Review Frequency and Timing......................................................................................- 24 3.3 ONGOING EVENT-RELATED CHANGES ............................................................................................................. - 25 3.3.1
Corporate Events Affecting Existing Index Constituents........................................................................- 25 3.3.1.1
3.3.1.2.
3.3.1.3.

3.3.2

3.3.2.1

Changes in FIF, Number of Shares or Industry Classification for Existing Constituents.................................................... - 25 Early Inclusions of Non-Index Constituents............................................................................................................................... - 26 Early Deletions of Existing Constituents ..................................................................................................................................... - 26 -Corporate Events Affecting Non-Index Constituents ..............................................................................- 27 IPOs and Other Early Inclusions .................................................................................................................................................. - 27 -3.4 ANNOUNCEMENT POLICY ................................................................................................................................. - 27 3.4.1
Annual Full Country Index Review..........................................................................................................- 27 3.4.2
Quarterly Index Review............................................................................................................................- 27 3.4.3
Ongoing Event-Related Changes ............................................................................................................- 27 3.4.3.1
3.4.3.2

IPOs and Other Early Inclusions .................................................................................................................................................. - 28 Global Industry Classification Standard (GICS) ......................................................................................................................... - 28 -Appendix I: Country Classification of Securities..............................................................................- 31 Appendix II: Free Float Definition and Estimation Guidelines ..................................................... - 34 Appendix III: Global Industry Classification Standard (GICS) ...................................................... - 40 Appendix IV: Minimum Size Guidelines ........................................................................................ - 47 Appendix V: Index Reviews During Transition Period .................................................................. - 52 Appendix VI: Gulf Cooperation Council Countries ........................................................................ - 54 Appendix VII: Quarterly and Annual Full Country Index Review Changes in FIFs ..................... - 55 Appendix VIII: Price Source for Securities ..................................................................................... - 56 Appendix IX: Policy Regarding Market Closures During Index Reviews...................................... - 57 Appendix X: Equity Markets and Universe..................................................................................... - 58 -MSCI Barra Index Research© 2007 MSCI Barra. All rights reserved
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Standard Index Series Methodology|November 2007

Introduction
MSCI: A Leading Global Benchmark Provider
Morgan Stanley Capital International Inc. (“MSCI”) is a leading provider of global equity, US equity, fixedincome hedge fund and multi-asset class indices, and benchmark related products and services to investors
worldwide.
Equity Indices
MSCI provides global equity indices, which over the last 30 years have become the most widely usedinternational equity benchmarks by institutional investors. Almost 2,000 organizations worldwide currently
use MSCI global equity benchmarks. Sector, industry groups, and industry indices are calculated based on the
Global Industry Classification Standard (GICS®), developed by MSCI and Standard and Poor’s. In addition,
MSCI provides value and growth indices for developed and emerging markets based upon a two-dimensional,
multifactor methodology for style definition and segmentation. In 2002, MSCI launched a new family of US
Equity Indices to provide broad and comprehensive coverage of the US equity market. This family of indicesconsists of a Broad Market Index and its various capitalization, style and sector sub-indices.

Fixed Income Indices
MSCI provides a wide range of global fixed income indices for the investment community, including indices
for Sovereign, Investment Grade and High Yield debt markets, as well as the Interest Rate Swaps market.
The MSCI Fixed Income Indices are unique in their use of an industry classification system based on the
GICS.

Hedge Fund Indices
In July 2002, MSCI launched a family of hedge fund indices based on a comprehensive classification system –The MSCI Hedge Fund Classification StandardSM – and a growing fund database, the MSCI Hedge Fund
DatabaseSM. The MSCI Hedge Fund Indices aim to reflect the composition and performance characteristicsof the entire hedge fund opportunity set and as such include open as well as closed funds. In parallel, MSCI
has developed an innovative index construction and maintenance methodology for investable hedge fundindices. The MSCI investable hedge fund composite-level indices aim to reflect the aggregate performance ofa diversified range of hedge fund strategies and are designed to be replicable in investment vehicles linked tothe indices.

Global Capital Markets Indices
MSCI has now launched the MSCI Global Capital Markets Index. This index is designed to provide aframework for global diversification by depicting the global opportunity set of marketable, liquid andinvestable financial securities that are available to all international investors, irrespective of their domicile. It
currently includes equity and fixed income securities which are represented by MSCI’s family of equity and
fixed income indices.

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Standard Index Series Methodology|November 2007

Executive Summary
The MSCI Equity Index Series
The objective of MSCI, with respect to its Equity Index Series, is to construct global benchmark indices that
contribute to the investment process by serving as relevant and accurate performance benchmarks andeffective research tools, and as the basis for various investment vehicles. As such, the MSCI Equity IndexSeries are designed to fulfill the investment needs of a wide variety of global institutional investors. In
constructing these indices, MSCI consistently applies its equity index construction and maintenancemethodology across regions and developed and emerging markets. This consistency of approach makes it
possible to aggregate individual country and industry indices to create meaningful regional and composite
benchmark indices.
MSCI has constructed its equity indices with the same objectives in mind for more than 30 years. Duringthat time, as the markets have evolved, MSCI’s methodology has also evolved in order to ensure that the
MSCI Equity Index Series continue to accurately represent the opportunities available to global institutional
investors. Importantly, while the methodology has evolved, the index construction objectives and guiding
principles have remained paramount.

Methodology and the MSCI Standard Index Series
The MSCI Standard Index Series adjusts the market capitalization of index constituents for free float andtargets for index inclusion 85% of free float-adjusted market capitalization in each industry group, in eachcountry. Currently, MSCI calculates the Standard Index Series for 50 countries globally in the developed andthe emerging markets.
This Methodology Book describes MSCI’s index construction objectives, guiding principles, and themethodology for the Standard Index Series. Certain specific aspects of MSCI’s Standard Index Series
methodology are treated in appendices at the end of the Methodology Book. Any updates to the
Methodology will be posted on the web site www.mscibarra.com. Other useful methodology guidelines canbe found in the same link.

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Standard Index Series Methodology|November 2007

Section 1: Equity Index Construction Objectives and Guiding Principles
1.1

Purpose and Objectives

MSCI’s objective is to construct “benchmark indices” that contribute to the investment process in thefollowing ways. First, they serve as a gauge for measuring the performance of a market. In so doing, these
indices also serve as performance benchmarks in the measurement and attribution of the performance of aninvestment strategy. Second, they may be used as a research tool for a variety of purposes, including in thestrategic asset allocation process. Performance benchmarks provide an important historical perspective on thevarious dimensions of investment performance of asset classes, such as returns, volatility of returns, andcorrelation. This historical perspective may serve as a useful guide in the determination of an appropriate
strategic asset mix. Finally, benchmark indices may serve as a basis for investment vehicles designed toreplicate the performance of a market or to implement and manage an investment policy. Given these uses,
MSCI’s benchmark indices are designed to fulfill the investment needs of a wide variety of global institutional
investors.

1.2

Guiding Principles

MSCI strives to achieve the objective of providing global benchmark equity indices by adhering to thefollowing guiding principles in the design and implementation of its index construction and maintenancemethodology.
1.2.1

Broad and Fair Market Representation

MSCI Standard Index Series is constructed and managed with a view to providing broad and fair market
representation. In the abstract, a total market index, representing all listed securities in a given market, would
achieve this goal. In practice, however, a total market index may be difficult to use as a true performancebenchmark for global investors, as it will include a very large proportion of small and/or illiquid securities,
which international investors may not be able to easily reflect in their portfolios. Therefore, MSCI defines
broad and fair market representation as an accurate and complete reflection in the indices of the structure anddistribution of business activities across and within industries that international institutional investors can gain
exposure to in a given market. MSCI strives to achieve the objective of broad and fair market representation
by following a bottom-up sampling approach to index construction. This approach, which builds the indicesfrom the industry group level up, aims to capture the structure and other characteristics of the underlying
total market, but does so with securities that are practically replicable in global institutional portfolios ofreasonable size. Specifically, to implement this approach, a target of 85% of free float-adjusted market
representation within each industry group, within each country is used as a guideline. This guideline strikes anappropriate balance between broad and fair market representation and investability of indices.
Given the objective of representing the diversity of business activities across and within industries, MSCI’s
sampling approach does not target a specific number of securities in its country indices. The number of
constituents included in an index is dependent on the breadth and depth of the underlying market and on theminimum size guidelines applied in the construction of the index. However, in certain cases, an appropriatebalance needs to be attained between including a large number of securities and the additional diversification
benefits that these securities bring to the index.

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1.2.2

Investability and Replicability

MSCI Equity Index Series are constructed and managed with a view to being fully investable from theperspective of international institutional investors. MSCI strives to achieve this objective by providing indicesthat are replicable. This includes representing constituents in the index at weights that can easily and costeffectively be reflected in global institutional portfolios of reasonable size. This objective is achieved by a)free float-adjusting constituent weights, taking into account any Foreign Ownership Limits (FOLs) and otherrestrictions that hinder the implementation of the investment process for international institutional investors
and b) selecting securities of reasonable size and liquidity for the indices.
1.2.3

Consistency of Approach

MSCI’s Standard Index Series is constructed and managed with a view to providing consistency of approachacross all markets around the world. This objective is achieved by applying MSCI’s index construction andmaintenance methodology, including its rules and guidelines, in a consistent fashion across all markets. The
consistent application of index methodology to all markets also makes it possible to apply a “building block”
approach in the construction of regional and composite indices. Under this approach, individual MSCI
country indices can be aggregated to create relevant, accurate, and comparable regional (e.g., MSCI Europe
Index) and composite (e.g., MSCI EAFE Index) benchmark indices.
1.2.4

Continuity and Index Turnover

MSCI’s Standard Index Series is managed with a view to ensuring the continuity of the indices. Continuity
refers to the consistent application of index methodology over time. It also implies that the primary, but not
the only, concern when considering additions and deletions is the continuity of constituents in the index
being reviewed. In emphasizing continuity, MSCI wishes to provide improved predictability of and greater
stability to the indices.
MSCI’s Standard Index Series is also managed with the objective of keeping the level of index turnover
relatively low, while at the same time reflecting the evolution of markets on a timely fashion. Therefore,
implementation of changes in the index takes into consideration the perspective of a portfolio that replicatesthe index and weighs the impacts from potential reverse and/or unnecessary turnover. As such, costs
associated with reflecting the changes in the MSCI Indices in a portfolio are maintained at a reasonable level.
1.2.5

Disciplined Approach: Principles, Rules and Guidelines

MSCI’s Standard Index Series is constructed and managed using a set of principles, rules and guidelines. Thisapproach makes it possible to attain certain desirable attributes of a benchmark index, such as, stability of theindex, proper diversification across industries and securities and accurate representation of the distribution
and structure of business activities within the overall market. These desirable features of a benchmark index
would be difficult to achieve through a fully rules based, mechanical methodology for inclusion and deletionof index constituents.
There are a number of areas in index construction and maintenance where clear, simple, and objective rules
can be, and are, applied by MSCI to simplify the index management process, without compromising theability of the indices to achieve the stated index construction objectives. In other more complicated areas ofindex construction and maintenance, where the use of rules may be impractical or may lead to conflicts withMSCI Barra Index Research© 2007 MSCI Barra. All rights reserved
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Standard Index Series Methodology|November 2007
the objectives of the indices, MSCI makes decisions based on its index guiding principles and guidelines. The
basic objective of index guidelines is to ensure that judgment can be applied in a structured and consistentfashion in order to reach final decisions.
1.2.6

Transparency

MSCI’s Standard Index Series is constructed and managed with a view to being transparent in the context of
MSCI’s index construction objectives, guiding principles and methodology. These objectives, guiding
principles and methodology are clearly specified and published. Additionally, as mentioned above, in someareas of index construction and maintenance, explicit index rules are applied to simplify the index
management process. These rules are published by MSCI and regularly updated if changes are made. In someother areas of index construction and maintenance, MSCI uses internal index guidelines to facilitate the index
decision-making process. These guidelines, by their nature, are not intended to be applied rigidly and are
subject to change as underlying market conditions change. Therefore, where index guidelines are used,explanations of the framework for analysis used to develop these index guidelines are also published, so thatinvestors and other users of MSCI products can better understand the spirit in which these guidelines aredeveloped and applied by MSCI in the decision-making process. Finally, in order to provide transparency andpredictability to the marketplace, MSCI has a policy of announcing all significant changes to its indices inadvance of implementing such changes. As a matter of policy, MSCI generally does not comment on any
potential changes to the indices, including but not limited to the potential inclusion of constituents before thechanges are made known to clients. In addition, MSCI does not comment in detail or provide a breakdown of
the shareholder ownership of securities due to the potentially price-sensitive nature of such information.
1.2.7

Independence and Objectivity

MSCI’s Standard Index Series is constructed and managed with a view to providing independent andobjective editorial and content decisions. With respect to editorial decisions, MSCI operates completely
independently of all interest groups, including its shareholders, and manages its family of equity indices basedon publicly available information. The fact that MSCI is editorially independent and objective does notpreclude MSCI from considering the views and suggestions of our clients and other users of our products
and services. To the contrary, MSCI believes in fully engaging all stakeholders by frequently soliciting
feedback, counsel, and guidance relating to all aspects of index construction and maintenance. MSCI carefully
considers and analyzes all the feedback received from various constituencies, and the final decisions are taken
independently of any single interest group or stakeholder and have the sole objective of preserving or
enhancing the quality of the MSCI indices.

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Standard Index Series Methodology|November 2007

Section 2: Constructing the MSCI Standard Index Series
To construct relevant and accurate equity indices for the global institutional investor under the Standard
Index Series Methodology, MSCI undertakes an index construction process, which involves:
•
•
•
•

2.1

Defining the equity universe.
Adjusting the total market capitalization of all securities in the universe for free float available toforeign investors.
Classifying the universe of securities under the Global Industry Classification Standard (GICS).
Selecting securities for inclusion according to MSCI’s index construction rules and guidelines.

Defining the Equity Universe

The index construction process starts at the country level, with the identification of the universe ofinvestment opportunities. Currently, MSCI creates equity indices for 56 country markets.
MSCI classifies each company and its securities in one and only one country. This allows securities to besorted distinctly by their respective countries. In general, companies and their respective securities areclassified as belonging to the country in which they are incorporated. All listed equity securities, or listed
securities that exhibit characteristics of equity securities, except investment trusts1, mutual funds, equity
derivatives, and limited partnerships, are generally eligible for inclusion in the universe. Generally, only equity
or equity-like securities that are listed in the country of classification are included in the universe2. These areconsidered fully even if a subset serves as a basis of creation of depository receipts. About 99% of the world’s
total equity market capitalization is included in the MSCI universe.
For further details on domicile determination, see Appendix I, entitled “Country Classification of Securities”.

2.2 Adjusting the Total Market Capitalization of Securities in the Universe for Free
Float
After identifying the universe of securities, MSCI calculates the free float-adjusted market capitalization ofeach security in that universe. The process of free float-adjusting market capitalization involves:
•
•
•

1

Defining and estimating the free float available to foreign investors for each security, using MSCI’s
definition of free float.
Assigning a free float-adjustment factor to each security.
Calculating the free float-adjusted market capitalization of each security.

Real Estate Investment Trusts (REITs) in certain countries are eligible for inclusion in the universe. Certain Income Trusts

are eligible for inclusion in the MSCI Canada equity universe. Please refer to Appendix I for details.
2

Special treatment is applied where there are a significant number of large companies trading exclusively outside of theircountry of classification, such as in the cases of China and Israel. Please refer to Appendix I for details.
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Standard Index Series Methodology|November 2007
2.2.1

Defining and Estimating Free Float

MSCI Barra defines the free float of a security as the proportion of shares outstanding that are deemed to beavailable for purchase in the public equity markets by international investors. In practice, limitations on free
float available to international investors include:• Strategic and other shareholdings not considered part of available free float.
• Limits on share ownership for foreign investors.
MSCI’s Barra’s estimation of free float is based solely on publicly available shareholder information obtained
from multiple information sources. For each security, all available shareholdings are considered where publicdata is available, regardless of the size of the shareholding. MSCI Barra may consult with analysts, otherindustry experts and official company contacts, particularly where disclosure standards or data quality makethe estimation of free float difficult.
For further details on the MSCI Barra’s free float definition, see Appendix II, entitled “Free Float Definition
and Estimation Guidelines”.
The estimation of free float available to international investors for securities with or without foreign
ownership limits is explained below.
2.2.1.1 Securities Not Subject to Foreign Ownership Limits (FOLs)
For securities not subject to FOLs, the free float of a security is estimated as its total number of shares
outstanding less shareholdings classified as strategic and/or non-free float. Examples of shares excluded fromfree float are stakes held by strategic investors such as governments, corporations, controlling shareholders
and management.
Non-Free Float Shareholdings (%) =Number of Shares Classified as Non-Free Float divided by the
Total Number of Shares

Free Float (%)

100% minus Non-Free Float Shareholdings (%)=

2.2.1.2 Securities Subject to FOLs
For securities subject to FOLs, the estimated free float available to foreign investors is equal to the lesser of:••

Estimate of free float, as defined above.
FOL adjusted for non-free float stakes held by foreign investors.

Free Float for Foreign Investors (%) =Lower of:• 100% minus Non-Free Float Shareholdings, Including Domestic and Foreign Shareholdings• FOL minus Foreign Non-Free Float Shareholdings

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Standard Index Series Methodology|November 2007
2.2.2

Assigning a Free Float-Adjustment Factor

MSCI free float-adjusts the market capitalization of each security using an adjustment factor referred to as theForeign Inclusion Factor (FIF).
2.2.2.1 Securities with Free Float Greater Than 15% and Not Subject to FOLs
For securities with free float greater than 15%, the FIF is equal to the estimated free float, rounded up to theclosest 5%.
2.2.2.2 Securities with Free Float Less than 15% and Not Subject to FOLs
For securities with free float less than 15%, the FIF is equal to the estimated free float, rounded to the closest
1%.
2.2.2.3 Securities Subject to FOLs
For securities subject to FOLs, the FIF is equal to the lesser of:••

Estimated free float available to foreign investors,− Rounded up to the closest 5%, if the free float is greater than 15%.
− Rounded to the closest 1%, if the free float is less than 15%.
FOL rounded to the closest 1%.

2.2.2.4 Securities Affected by Other Foreign Investment Restrictions
For securities affected by other foreign investment restrictions, which hinder the efficient implementation of
the investment process for foreign investors, an additional adjustment factor, referred to as the Limited
Investability Factor (LIF), is applied. In these special cases, the free float-adjusted for limited investability isdefined as the product of the available free float for foreign investors and the LIF.
Free Float-Adjusted for Limited Investability = Free Float for Foreign Investors times the LIF
Therefore, for securities subject to other foreign investment restrictions, the Foreign Inclusion Factor is equal
to the lesser of:• Estimated free float-adjusted for limited investability,- Rounded up to the closest 5%, if the free float-adjusted for limited investability is greater than
15%.
- Rounded to the closest 1%, if the free float-adjusted for limited investability is less than 15%.
• FOL rounded to the closest 1%.
2.2.3. Calculating the Free Float-Adjusted Market Capitalization
The free float-adjusted market capitalization of a security is calculated as the product of the FIF and the
security’s full market capitalization.
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Standard Index Series Methodology|November 2007
Free Float-Adjusted Market Capitalization = FIF times the Security’s Full Market Capitalization
The following examples illustrate the calculation of the free float-adjusted market capitalization of securities
with and without FOLs.
Example:Calculating Free Float-Adjusted Market Capitalization:
Securities Not Subject to FOLs
Company A

Company B

Total number of shares outstanding
10,000,000
Number of shares classified as non-free float
4,300,000
Non-free float shareholding (%)
43.0%
Free float (%)
57.0%
Foreign Inclusion Factor (FIF)
0.60
Market price ($)
500
Full market capitalization ($ mm)
5,000
Free float-adjusted market capitalization ($ mm) 3,000

10,000,000
8,760,000
87.6%
12.4%
0.12
500
5,000
600

Example:Calculating Free Float-Adjusted Market Capitalization:
Securities Subject to FOLs
Company C
Company D
Company E
Total number of shares outstanding
10,000,000
10,000,000
10,000,000
All shares classified as non-free float
8,760,000
4,000,000
4,000,000- those held by foreign investors as strategic
1,000,000
1,000,000
Total non-free float shareholdings (%)
87.6
40.0
40.0
Free float (%)
12.4
60.0
60.0
Foreign ownership limit (%)
33.3
33.3
33.3
Foreign strategic shareholding (%)
10.0
10.0
0.0
Foreign ownership limit less the foreign
strategic shareholding (%)
23.3
23.3
33.3
Foreign Inclusion Factor (FIF)
0.12
0.25
0.33
Market price ($)
500
500
500
Full market capitalization ($ mm)
5,000
5,000
5,000
Free float-adjusted market capitalization ($ mm) 600
1,250
1,650

2.3

Classifying Securities Under the Global Industry Classification Standard (GICS)

In addition to the free float-adjustment of market capitalization, all securities in the universe are assigned tothe industry that best describes their business activities. To this end, MSCI has designed in conjunction withStandard & Poor’s, the Global Industry Classification Standard (GICS). This comprehensive classification
scheme provides a universal approach to industries worldwide and forms the basis for achieving MSCI’s
objective of reflecting broad and fair industry representation in its indices.
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2.3.1

Structure of the Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) consists of 10 sectors, 24 industry groups, 67 industries,
and 147 sub-industries. These four industry groupings are strictly hierarchical, as shown below.
The Global Industry Classification Standard (GICS)
10 Sectors

24 Industry Groups

67 Industries

147 Sub-Industries

2.3.2

Industry Classification of Companies under the GICS

Under the Global Industry Classification Standard (GICS), each company is assigned uniquely to one subindustry according to its principal business activity. Therefore, a company can only belong to one industry
grouping at each of the four levels of the GICS.
Classifying securities into their respective sub-industries can be complex, especially in an evolving anddynamic environment. The GICS guidelines used to determine the appropriate industry classification are:•••A security is classified in a sub-industry according to the business activities that generate
approximately 60% or more of the company’s revenues.
A company engaged in two or more substantially different business activities, none of which
contributes 60% or more of revenues, is classified in the sub-industry that provides the majority ofboth the company’s revenues and earnings.
Where the above guidelines cannot be applied, or are considered inappropriate, further analysis isconducted, and other factors are analyzed to determine an appropriate classification.

For further details on the GICS, see Appendix III, entitled “Global Industry Classification Standard (GICS)”.

2.4

Selecting Securities for Index Inclusion

In order to ensure a broad and fair representation in the indices of the diversity of business activities in theuniverse, MSCI follows a “bottom-up” approach to index construction, building indices from the industry
group level up. The bottom-up approach to index construction requires a thorough analysis andunderstanding of the characteristics of the universe. This analysis drives the individual security selection
decisions, which aim to reflect the overall features of the universe in the country index.
MSCI targets an 85% free float-adjusted market representation level within each industry group, within eachcountry. The security selection process within each industry group is based on the careful analysis of:
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Standard Index Series Methodology|November 2007
•
•

•

2.4.1

Each company’s business activities and the diversification that its securities would bring to the index.
The size (based on free float-adjusted market capitalization) and liquidity of securities. All other things
being equal, MSCI targets for inclusion the most sizable and liquid securities in an industry group. In
addition, securities that do not meet the minimum size guidelines discussed below and/or securities
with inadequate liquidity are not considered for inclusion.
The estimated free float for the company and its individual share classes. Only securities of companies
with an estimated overall and/or security free float greater than or equal to 15% are, in general,considered for inclusion.
Index Constituent Eligibility Rules and Guidelines

In order to ensure the investability of the MSCI Standard Index Series, the following index eligibility rules
and guidelines for index inclusion are applied in the index construction process.
These rules and guidelines are applied at the security level, rather than the company level. As such, theinclusion or deletion of one share class does not imply the automatic inclusion or deletion of the other shareclasses and tracking stocks of the same company.
2.4.1.1 Minimum Size Guidelines
All securities that are considered for inclusion or currently are included in the MSCI Standard Index Series
must be of reasonable size, in terms of free float-adjusted market capitalization. In order to derive guidelines
on eligible minimum size for inclusion and deletion for various countries and country groupings, thefollowing factors are considered:••••

The overall free float-adjusted market capitalization of the market.
The distribution of free float-adjusted market capitalization in the country.
The level of market concentration.
The marginal contribution to the market of the largest security at different percentiles of the free
float-adjusted market capitalization distribution.
• Other characteristics of the underlying market.
For further details on size-related eligibility criteria, see Appendix IV, entitled “Minimum Size Guidelines”.
2.4.1.2 Liquidity
All securities that are considered for inclusion or currently are included in the MSCI Indices must haveadequate liquidity. However, liquidity is not the sole determinant for inclusion in the index, though it is an
important consideration.
In making an assessment of adequate liquidity levels, a number of absolute and relative liquidity measures are
considered. These include patterns of traded volume and traded value over several periods of time. A usefulmeasure to compare liquidity within the same market is the Annualized Traded Value Ratio (ATVR), whichscreens out extreme daily trading volumes and takes into account the difference in market capitalization sizeof securities.
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The ATVR Ratio of each security is calculated in a 3-step process described below:•••

First, monthly median traded values are computed using the daily median traded value, multiplied by
the number of days in the month that the security traded. The daily traded value of a security is equal
to the number of shares traded during the day, multiplied by the closing price of that security. The
daily median traded value is the median of the daily traded values in a given month.
Second, the monthly median traded value ratio is obtained by dividing the monthly median tradedvalue of a security by its free float-adjusted security market capitalization at the end of the month.
Third, the ATVR is obtained by taking the average of the monthly median trade value ratios of theprevious 12 months – or the number of months for which this data is available – and multiplying it by
12.

The analysis of the adequacy of a security’s liquidity also considers the average liquidity for the country andthe industry group to which the security belongs. In addition, in some cases, while assessing the liquidity of a
local security, the trading volumes in depository receipts, such as ADRs or GDRs may also be considered.
MSCI does not define absolute minimum or maximum liquidity levels for stock inclusion or exclusion from
the MSCI Standard Index Series, but considers their relative standing within each country and between cycles.
This is because liquidity is not comparable between countries. In addition, liquidity is partly a function of thecyclicality of markets and industries, and limiting index constituents to only the most liquid stocks would
introduce a bias against those stocks and sectors that are temporarily out of favor with investors.
2.4.1.3 Companies and Securities with a FIF less than 0.15
Securities of companies with a FIF less than 0.15 across all share classes are generally not eligible forinclusion. Exceptions to this general rule are made only in significant cases, where not including a security ofa large company would compromise the index’s ability to fully and fairly represent the characteristics of theunderlying market.
For a security with a company and/or security FIF below 0.15 to be eligible for inclusion, the free floatadjusted market capitalization of the security must represent at least:• 10 basis points of the MSCI World Index or 15 basis points of the MSCI EM Index, if included, OR• 5% of the country index to which the security would belong, if included.
As a result of a corporate event (other than conversion of share classes or merger of different shareclasses) or due to performance, if the company and/or security FIF of an existing constituent decreases
to less than 0.15, in order to remain in the index, the free float-adjusted market capitalization of the
security must represent at least:• 10 basis points of the MSCI World Index or 15 basis points of the MSCI EM Index, OR• 5% of the country index to which the security belongs.

2.4.1.4 Foreign RoomFor a security that is subject to a Foreign Ownership Limit (FOL), in determining eligibility for index
inclusion and in determining an affected constituent’s weight in an index, MSCI Barra will additionally take
into consideration the proportion of shares still available to foreign investors relative to the maximum
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Standard Index Series Methodology|November 2007
allowed (referred to as “foreign room”). Securities with less than 25% foreign room are typically not eligible
for index inclusion. Current constituent securities for which there is no foreign room left may remain in theindex, but their weight may be reduced by the application of a Limited Investability Factor (LIF).
2.4.2

Target Representation

As mentioned above, in constructing the country indices, MSCI aims to achieve a uniform level of 85% of
free float-adjusted market representation within each industry group, within each country.
2.4.2.1 Target Representation at Various Industry Levels
In certain circumstances, the 85% representation target may be applied at the industry or the sub-industry
level. This is the case of deep and broadly diversified markets, such as the USA and Japan, where the 85%
target is applied at the sub-industry level. It may also happen in the case of highly concentrated industry
groups, which are dominated by a sub-industry. For example, in many developed markets large
pharmaceutical companies dominate the Pharmaceuticals and Biotechnology industry group. In these cases,
targeting the 85% market representation at the industry group level would result in these large pharmaceuticalcompanies accounting for almost all of the targeted 85% coverage, thus leaving little room for the inclusionof the smaller, though quite significant, biotechnology firms.
Example:The USA Pharmaceuticals and Biotechnology Industry GroupIn the USA, the number of securities at the sub-industry level demonstrates the depth of the Pharmaceuticals
and Biotechnology Industry Group. For example, (at the time of the review as of April 30, 2001), there were
198 securities in the Biotechnology sub-industry. Many of these listed securities are relatively large and liquid,and hence potential candidates for index inclusion.
If MSCI were to select securities for index inclusion focusing solely on the largest free float-adjusted market
capitalization at the Pharmaceuticals and Biotechnology industry group level, this would lead to securities in
the Pharmaceuticals sub-industry dominating the industry group. In this case, selecting securities for index
inclusion by targeting an 85% market representation in each of the Pharmaceuticals and Biotechnology subindustry levels allows for the inclusion of relatively large and liquid securities from both sub-industries. This
results in an index, which better represents the full breadth of business activities in this industry group
without sacrificing investability.
In trying to achieve adequate industry representation, all other things being equal, MSCI attempts to include
operating companies, rather than holding or investment companies, as they are better representatives ofindustries.
2.4.2.2 Over- and Under-Representation
The distribution of free float-adjusted market capitalization and the level of concentration within industries
and industry groups also affect the level of market representation that can reasonably be realized in a country
index. This may result in an industry group representation level that may exceed or remain below the 85%
target representation guideline. These differences in the structure of industries account for the differences in
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the market representation of industries and industry groups that are actually achieved in the indices.

Example:Over-Representation
Suppose two securities, Cell Co and Mobile Corp, dominate the Wireless Telecommunications Services
industry in a country, accounting for 70.0% and 23.0% of the free float-adjusted market capitalization of theindustry, respectively at the time of the review.
Including only the larger Cell Co in the index would yield an industry representation of 70%, which is 15%
below the desired target representation of 85%. Including Mobile Corp in the index, in addition to Cell Co,
would result in the industry representation increasing to 93%, which is 8% above the 85% targeted guideline.
In this case, all other things being equal, it would be more appropriate to include both companies in theindex, as the resulting industry group representation would be closer to the 85% target level.

Example:Under-Representation
Suppose the Energy industry group in a given country at the time of the review consists of four companies,
Drilling Corp, Exploration Corp, National Oil Company, and Marketing Co, accounting for 35%, 20%, 40%,
and 5% of the free float-adjusted market capitalization of the industry group, respectively.
Drilling Corp and Exploration Corp are both exclusively engaged in the exploration and production of oil
and gas products. National Oil Company and Marketing Co, on the other hand, are exclusively engaged in therefining and marketing of oil and gas products.
In this case, including Drilling Corp and National Oil Company would provide a better diversification ofbusiness activities in the index. The inclusion of both companies would result in an industry grouprepresentation of 75%. In addition to these two companies, it would be more appropriate to include
Marketing Co in the index, rather than Exploration Corp, as the resulting industry group representation of
80% would be closer to the 85% target than the industry group representation of 95% that would result fromthe inclusion of Exploration Corp. Therefore, in this example, all other things being equal, Exploration Corp
would not be added to the index and the industry group representation would remain at 80%.
This example also highlights the fact that in certain industry groups the application of the 85% industry grouprepresentation target could lead to a large company, such as Exploration Corp, not being added to the index,
while a smaller company, such as Marketing Co, might be included in the index.
2.4.2.3. Security Size and Target Market Representation
In certain cases, the free float-adjusted market capitalization representation that is achieved in the index for agiven industry group may remain below the targeted 85% level because only a few securities in the industry
are of a size that is considered reasonable for inclusion in the country index.
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Standard Index Series Methodology|November 2007
For further details on minimum size guidelines, see Section 2.4.1.1 and Appendix IV, entitled “Minimum Size
Guidelines”.
Example:Security Size and Industry Representation
Suppose that an industry group consists of 25 securities at the time of the review. The five largest securities inthis industry group have a free float-adjusted market capitalization of over $US 1,000 million each. These fivesecurities account for 75% of the free float-adjusted market capitalization of the industry group. The
remaining securities have a free float-adjusted market capitalization of less than $US 300 million each. For
this country the appropriate size for inclusion in the country index is estimated at $US 400 million, in free
float-adjusted terms.
In this example, the five largest securities in the industry group are included in the index, while the remaining
securities are not considered for inclusion due to small size. As a result, only a 75% industry
representation is achieved in the index for this industry group.

2.4.2.4 Number of Constituents and Industry Representation
MSCI does not target a specific number of securities for inclusion in its indices. However, there may beinstances where an appropriate balance needs to be attained between including a large number of securities
and the additional diversification benefits that these securities bring to the country index.
Example:The USA Biotechnology Sub-Industry
As mentioned above, in the case of the USA, there are 198 securities in the Biotechnology sub-industry (as ofApril 30, 2001). Many of these listed securities are of a similar size, which is considered reasonable for thecountry. These companies are hence potential candidates for index inclusion.
If the 85% industry representation target were strictly followed, it would result in the inclusion of
approximately 50 securities. This number is considered too large, in the context of the relative size of thesesecurities, their marginal contribution to the country index and the additional diversification benefits theybring to the index. Therefore, including a much smaller number of securities is considered appropriate, eventhough it results in a sub-industry representation, which remains below the target level of 85%.
2.4.2.5 Industry Representation: A Summary
In constructing its Standard Index Series under the methodology, MSCI aims to target a free float-adjusted
market representation of 85% within each industry group, within each country. However, because ofdifferences in the structure of industries, this industry representation target may not be exactly and uniformly
achieved in the indices across all industry groups. The differences in the structure of industries, and other
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Standard Index Series Methodology|November 2007
considerations, may lead to over- or under-representation in certain industries. In these instances, the indices
are constructed with a view to minimizing the divergence between the industry group representation achievedin the index and the 85% representation guideline.
Since the over- and under-representation of industries is unlikely to be exactly off-setting, the averageindustry group representation achieved in a given country is also likely to be different from the 85% level.
MSCI’s bottom-up approach to index construction, which builds the equity indices from the industry grouplevel up, coupled with the 85% industry group representation guideline, may at times lead to a large company
in an industry group not being included in the index, while a smaller company from the same or a different
industry group might be added. Also, since the MSCI Standard Index Series is built from a country
perspective, a large company in an industry group in one country may not be included in that country’s index,
while a smaller company in the same industry group in another country might be added to that country’s
index.

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Standard Index Series Methodology|November 2007

Section 3: Maintaining the MSCI Standard Index Series
The MSCI Standard Index Series is maintained with the objective of reflecting the evolution of the underlying
equity markets on a timely basis. In maintaining the indices, emphasis is also placed on continuity, replicability
and on minimizing turnover in the indices.
Maintaining the indices involves many aspects, including additions to and deletions from the indices andchanges in number of shares and changes in Foreign Inclusion Factors (FIFs) as a result of updated free float
estimates.
Potential additions are analyzed not only with respect to their industry group, but also with respect to theirindustry or sub-industry group, in order to represent a wide range of economic and business activities. All
additions are considered in the context of MSCI’s Methodology, including the index constituent eligibility
rules and guidelines described in Section 2.4.1.
In assessing deletions, it is important to emphasize that the indices must represent the full-investment cycle,
including bull as well as bear markets. Out-of-favor industries and their securities may exhibit declining
prices, declining market capitalization, and/or declining liquidity, and yet are not deleted because they
continue to be good representatives of their industry group.
As a general policy, changes in number of shares are coordinated with changes in Foreign Inclusion Factor(FIF) to accurately reflect the investability of the underlying securities. In addition, MSCI continuously strives
to improve the quality of its free float estimates and the related Foreign Inclusion Factors (FIFs). Additional
shareholder information may come from better disclosure by companies or more stringent disclosure
requirements by a country’s authorities. It may also come from MSCI’s ongoing examination of new
information sources for the purpose of further enhancing free float estimates and better understanding
shareholder structure’s. When MSCI identifies useful additional sources of information, it seeks toincorporate them into its free float analysis.
Overall, index maintenance can be described by three broad categories of implementation of changes.
•••

Annual full country index reviews that systematically re-assess the various dimensions of the equity
universe for all countries and are conducted on a fixed annual timetable.
Quarterly index reviews, aimed at promptly reflecting other significant market events.
Ongoing event-related changes, such as mergers and acquisitions, which are generally implemented in theindices promptly as they occur.

Please note that potential changes in the status of countries (standalone, emerging, developed) follow theirown separate timetables. These changes are normally implemented in one or more phases at the regularannual full country index review and quarterly index review dates.

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Standard Index Series Methodology|November 2007
3.1

Annual Full Country Index Review in May

The objective of the annual full country index review is to systematically re-assess the various dimensions of
the equity universe for all countries on a fixed annual timetable. This includes a re-appraisal of the free floatadjusted industry group representation within a country, a detailed review of the shareholder information
used to estimate free float for constituent and non-constituent securities, updating of minimum size
guidelines for new and existing constituents, as well as changes typically considered for a quarterly index
review as discussed below.
3.1.1

Annual Full Country Index Review Changes in ConstituentsDuring a full country index review, securities may be added to or deleted from a country index for a range ofreasons, including the reasons underlying constituent changes during quarterly index reviews, outlined in
Section 3.2.1. Other reasons for additions and deletions that are unique to the annual full country index
review include the following:
•
•
•

3.1.2

Additions or deletions of securities following the re-appraisal of the free float-adjusted industry grouprepresentation within a country relative to the 85% target.
Additions or deletions of securities following an update of the minimum size guidelines for additions
and deletions described in Appendix IV.
Deletion of securities with company and/or security free float of less than 15% that have decreased insize in terms of free float-adjusted market capitalization due to reduction in free float as a result of acorporate event (other than conversion of share classes or merger of different share classes) or due toperformance and that no longer meet the criteria described in section 2.4.1.3.
Annual Full Country Index Review Changes in Foreign Inclusion Factors (FIFs)

During an annual full country index review, a detailed review of the shareholder information used to estimate
free float for constituent and non-constituent securities is carried out. As such, the review will becomprehensive, covering all aspects of shareholder information. Changes in FIFs also include those typically
implemented during quarterly index reviews, as outlined in Section 3.2.2.
For further details on FIF changes that are implemented during an annual full country index review, see
Appendix VII entitled “Quarterly and Annual Index Review Changes in FIFs”.
3.1.3

Annual Full Country Index Review Frequency and Timing

The annual full country index review for all the MSCI Standard Country Indices is carried out once every 12
months and implemented as of the close of the last business day of May. Please refer to Appendix VIII for
details on MSCI’s policy regarding market closures during index reviews.

3.2

Quarterly Index Review

The Quarterly index review process is designed to ensure that the indices continue to be an accurate
reflection of the evolving equity marketplace. This is achieved by rapidly reflecting significant market drivenchanges that were not captured in the index at the time of their actual occurrence and that should not wait
until the annual full country index review due to their importance. These quarterly index reviews may result in
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Standard Index Series Methodology|November 2007
additions, deletions, and changes in FIFs and in number of shares.
3.2.1

Quarterly Index Review Changes in ConstituentsDuring a quarterly index review, securities may be added to or deleted from a country index for a variety ofreasons including the following:
•
•
•

•

•
•
•
•
•
•
3.2.2

Additions or deletions of securities, due to one or more industry groups having become significantly
over- or under-represented as a result of mergers, acquisitions, restructuring and other major market
events affecting that industry group.
Additions or deletions resulting from changes in industry classification, significant increases ordecreases in free float, and relaxation/removal or decreases of Foreign Ownership Limits (FOLs) not
implemented immediately.
Additions of large companies that did not meet the minimum size criterion for early inclusion at thetime of their IPO or secondary offering described in section 3.3.2.1. Please note that newly-listed
equity securities that did not meet these early inclusion criteria are eligible for inclusion at thequarterly index review immediately following their IPO, or at the following quarterly index review if
the trading period was too short to assess the security’s investability.
IPOs eligible according to section 3.3.2.1, and for which the effective date of inclusion is either 5 days
before the effective date of the QIR/AIR or 3 days after, will be made effective to coincide with the
QIR/AIR. Example: effective date of inclusion of the IPO is August 29 (3 business days before
September 1), while the effective date of the QIR is September 1; in that case the IPO will be added
effective September 1.
Replacement of companies, which are no longer suitable industry representatives.
Deletion of securities whose company and/or security free float has fallen to less than 15% as a resultof a corporate event (other than conversion of share classes or merger of different share classes) andwhich do not meet the criteria described in section 2.4.1.3.
Deletion of securities that have become very small or illiquid.
Replacement of securities (additions or deletions) resulting from the review of price source forconstituents with both domestic and foreign board quotations.
Additions or deletions of securities resulting from the review of NVDRs in Thailand described inAppendix II.
Additions or deletions of securities as a result of other market events.
Quarterly Index Review Changes in FIFs

Significant changes in free float estimates and corresponding changes in the FIFs for constituents, related torelatively large events, are reflected in the indices at the quarterly index reviews. Changes may result from thefollowing:•••

Large market transactions, involving strategic shareholders, which are publicly announced (forexample transactions made by way of immediate bookbuilding and other processes, e.g. block sales orblock buys).
Secondary offerings that, given the lack of sufficient notice, were not reflected immediately, andsecondary offerings that represent less than 5% of the security’s number of shares.
Increases in Foreign Ownership Limits (FOLs). Foreign Ownership Limits restrict the proportion of

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Standard Index Series Methodology|November 2007
•
•
•
•
•
•

a security’s share capital that is authorized for purchase by non-domestic investors.
Decreases in FOLs not applied earlier as they did not oblige foreign investors to immediately sellshares in the market.
Corrections resulting from the reclassification of shareholders from strategic to non-strategic, (andvice versa) and rectification of number of shares outstanding.
Update of FIFs following the public disclosure of the new shareholder structure for companies
involved in mergers, acquisitions or spin-offs, where different from MSCI Barra’s pro forma free float
estimate at the time of the event.
Large conversions of exchangeable bonds and other similar securities into already existing shares.
End of lock-up periods or expiration of loyalty incentives for non-strategic shareholders, which
determine the reclassification of these shareholdings and result in an increase in free float.
Changes in FIFs resulting from other events of similar nature. However, FIF changes resulting fromupdates in NVDRs in Thailand are applied in the indices on a semi-annual basis and not quarterly
basis.

For further details on FIF changes that are implemented during a quarterly index review, see Appendix
VII, entitled “Quarterly and Annual Full Country Index Review Changes in FIFs”.
3.2.3 Quarterly Index Review Changes in Number of Shares
Updates in number of shares are generally small changes in a security’s shares outstanding and MSCI Barra
implements these at the Quarterly Index Review rather than at the time of the change. Changes in Numberof Shares (NOS) generally occur due to:
•
•
•
•
•
•
•

Exercise of options or warrants and employee stock option plans.
Conversion of convertible bonds or other instruments, including periodic conversion of preferredstocks, and small debt-to-equity swaps.
Periodic share buybacks and cancellation of treasury shares.
Increases in a security’s number of shares resulting from acquisition of non-listed companies andconversion of unlisted shares.
Increases of less that 5% of a security’s number of shares resulting from any equity offering.
Other changes in number of shares resulting from events that could not be implemented on ornear the effective dates, and where no price adjustment factor (PAF) is necessary.
Share cancellations.

Updates in number of shares implemented as part of the quarterly index review could also trigger a review ofthe free float of the security. Any resultant change in FIF would be implemented simultaneously.
3.2.4

Quarterly Index Review Frequency and Timing

The implementation of changes resulting from a quarterly index review occurs on only three dates
throughout the year: as of the close of the last business day of February, August and November. Any country
indices may be impacted at the quarterly index review. Please refer to Appendix VIII for details on MSCI’s
policy regarding market closures during index reviews.

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Standard Index Series Methodology|November 2007
3.3

Ongoing Event-Related Changes

Ongoing event-related changes to the indices are the result of mergers, acquisitions, spin-offs, bankruptcies,
reorganizations and other similar corporate events. They can also result from capital reorganizations in theform of rights issues, bonus issues, public placements and other similar corporate actions that take place on acontinuing basis. These changes are reflected in the indices at the time of the event.
General principles that are applied in the treatment of these ongoing event-related changes are described in
the following pages. The handling of ongoing event-related changes can be classified in two broad categories:••

Corporate events affecting existing index constituents.
Corporate events affecting non-index constituents.

3.3.1

Corporate Events Affecting Existing Index Constituents

Corporate events can affect existing index constituents in various ways:•••

Changes in Foreign Inclusion Factor (FIF), number of shares or industry classification for existing
constituents.
Early inclusions of non-index constituents.
Early deletions of existing index constituents.

3.3.1.1 Changes in FIF, Number of Shares or Industry Classification for Existing Constituents
In order to ensure that the index accurately reflects the investability of the underlying securities, it is a generalpolicy to coordinate changes in number of shares with changes in FIF.
When two companies merge, or a company acquires or spins-off another company, the free float of theresulting entity is estimated on a pro forma basis, using pro forma number of shares if applicable, and thecorresponding FIF is applied simultaneously with the event. When there is a subsequent public disclosure
regarding the new shareholder structure, which results in a different free float estimation than at the time ofthe event, MSCI will update the FIF at the next quarterly index review. Other corporate events, which resultin a change in shareholder structure or FOLs and FIFs, will typically be reflected in the indices simultaneouslywith the implementation of the event in the index. Any other pending shareholder information updates orreclassifications will generally also be reflected in the pro forma free float estimation related to the event.
In the cases of decreases in FOLs in which foreign investors are obliged to immediately sell shares in themarket, such changes will be implemented in the indices as soon as possible.
Changes in number of shares and FIF resulting from primary equity offerings representing more than 5% of
the security’s number of shares are generally implemented as of the close of the first trading day of the newshares, if all necessary information is available at that time. Otherwise, the event is implemented as soon aspracticable after the relevant information is made available. A primary equity offering involves the issuance of
new shares by a company.

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Standard Index Series Methodology|November 2007
Changes in number of shares and FIF resulting from primary equity offerings representing less than 5% of
the security’s number of shares are deferred to the next regularly scheduled Quarterly Index Review following
the completion of the event.
For public secondary offerings of existing constituents representing more than 5% of the security’s numberof shares, where possible, MSCI Barra will announce these changes and reflect them shortly after the resultsof the subscription are known. Secondary public offerings that, given lack of sufficient notice, were notreflected immediately will be reflected at the next Quarterly Index Review. Secondary offerings involve the
distribution of existing shares of current shareholders’ in a listed company and are usually pre-announced by acompany or by a company’s shareholders and open for public subscription during a pre-determined period.
For US securities, increases in number of shares and changes in FIF resulting from primary equity offerings
and from secondary offerings representing at least 5% of the security’s number of shares will be implemented
as soon as practicable after the offering is priced. Generally, implementation takes place as of the close of thesame day that the pricing of the shares is made public. If this is not possible, the implementation will takeplace as of the close of the following trading day.
Changes in industry classification resulting from a corporate event are generally implemented simultaneouslywith the event. Other changes in industry classifications are implemented at the end of the month.
3.3.1.2. Early Inclusions of Non-Index Constituents
When there is a corporate event affecting index constituents, non-index constituents that are involved in themarket event are generally considered for immediate inclusion in the MSCI indices, as long as they meet all
the index constituent eligibility rules and guidelines described in Section 2.4.1 and 2.4.2.
For example, if a non-constituent company acquires a constituent company, the constituent company’s
securities may be replaced by the securities of the acquiring company. Similarly, if a constituent company
merges with a non-constituent company, the merged company may replace the constituent company. In
addition, securities spun-off from existing constituents may be considered for early inclusion at the time ofthe event.
3.3.1.3. Early Deletions of Existing Constituents
MSCI will remove from the MSCI Standard Index Series as soon as practicable securities of companies thatfile for bankruptcy, companies that file for protection from their creditors and/or are suspended and forwhich a return to normal business activity and trading is unlikely in the near future.
When the primary exchange price is not available, MSCI will delete securities at an over-the-counter or
equivalent market price when such a price is available and deemed relevant. If no over-the-counter or
equivalent price is available, the company will be deleted at the smallest price (unit or fraction of thecurrency) at which a security can trade on a given exchange.
Securities may also be considered for early deletion in other significant cases, such as decreases in free float
and FOLs. In addition, when a constituent company acquires or merges with a non-constituent company or
spins-off another company, the securities of the constituent company may be removed from the index, if, forexample, these securities are no longer representative of the industry as a result of the event.
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Standard Index Series Methodology|November 2007
For securities that are suspended, MSCI will carry forward the market price immediately prior to thesuspension during the suspension period.
3.3.2

Corporate Events Affecting Non-Index Constituents

3.3.2.1 IPOs and Other Early Inclusions
In general, newly listed equity securities available to foreign investors are considered for inclusion in the
MSCI Indices, according to MSCI’s Standard Index Series Methodology index rules and guidelines, at thetime of the quarterly index review. However, for IPOs, which are significant in size and meet all the MSCI
inclusion criteria, an early inclusion, outside of the quarterly index review, may be considered. If the decision
is made to include an IPO early, it will generally become effective after the close of the company’s tenth dayof trading. However, in certain cases, another date may be chosen for the inclusion to reduce turnover, forexample, where the normal inclusion date is close to the effective date of the next quarterly index review.
Securities may also be considered for early inclusion in other significant cases, including those resulting fromremoval or relaxation of FOLs, a large additional offering of an already listed security, consolidation or
restructuring in the industry giving rise to a large new company, or company spun-off from a non-constituent
company. Such cases will be treated in the same way as the IPOs.
In order to qualify for IPOs and other early inclusions, a security must meet the index constituent eligibility
rules and guidelines described in Section 2.4.1 and have a free float-adjusted market capitalization of at least 4
times the minimum size guidelines for normal inclusion.
For further details on size-related eligibility criteria, see Appendix IV, entitled “Minimum Size Guidelines”.

3.4

Announcement Policy

3.4.1

Annual Full Country Index Review

The results of the annual full country index reviews are announced at least two weeks in advance of theireffective implementation dates as of the close of the last business day of May.
3.4.2 Quarterly Index Review
The results of the quarterly index reviews are announced at least two weeks in advance of their effective
implementation dates as of the close of the last business day of February, August and November.
3.4.3

Ongoing Event-Related Changes

All changes resulting from corporate events are announced prior to their implementation in the MSCI
Indices.
The changes are typically announced at least ten business days prior to these changes becoming effective in
the indices as an “expected” announcement, or as an “undetermined” announcement, when the effective
dates are not known yet or when aspects of the event are uncertain. MSCI sends “confirmed”
announcements at least two business days prior to events becoming effective in the indices, provided that all
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Standard Index Series Methodology|November 2007
necessary public information concerning the event is available. The full list of all new and pending changes isdelivered to clients on a daily basis, at 5:30 PM US Eastern Standard Time (EST) through the Advance
Corporate Events (ACE) File.
In exceptional cases, events are announced during market hours for same or next day implementation.
Announcements made by MSCI during market hours are usually linked to late company disclosure ofcorporate events or unexpected changes to previously announced corporate events.
In the case of secondary offerings representing more than 5% of a security’s number of shares for existing
constituents, these changes will be announced prior to the end of the subscription period when possible anda subsequent announcement confirming the details of the event (including the date of implementation) will
be made as soon as the results are available.
Both primary equity offerings and secondary offerings for US securities, representing at least 5% of the
security’s number of shares, will be confirmed through an announcement during market hours for next day or
shortly thereafter implementation, as the completion of the events cannot be confirmed prior to thenotification of the pricing.
Early deletions of constituents due to bankruptcy or other significant cases are announced as soon aspracticable prior to their implementation in the MSCI indices.
A more descriptive text announcement is sent to clients for significant events that meet any of the following
criteria:
1. Additions and deletions of constituents.
2. Changes in free float-adjusted market capitalization equal to or larger than USD 5 billion, or with an
impact of at least 1% of the constituent's underlying country index.
If warranted, MSCI may make additional announcements for events which are complex in nature and would
benefit from additional clarification.
3.4.3.1 IPOs and Other Early Inclusions
Early inclusions of large IPOs in the MSCI Standard Index Series are announced no earlier than shortly
before the first day of trading and no later than before the opening of the third day of trading in the market
where the company has its primary listing.
Early inclusions of already listed securities following large secondary offerings of new and/or existing sharesare announced no earlier than shortly after the end of the offer period.
It is MSCI policy not to comment on future listed equity securities, including their industry classification
under the Global Industry Classification Standard (GICS), their country classification and their potential
inclusion in an MSCI Index. The same applies to non-index constituents that are already listed with pendinglarge events.
3.4.3.2

Global Industry Classification Standard (GICS)

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Standard Index Series Methodology|November 2007
Non-event related changes in industry classification at the sub-industry level are announced at least two
weeks prior to their implementation as of the close of the last business day of each month.
MSCI announces GICS changes twice a month, the first announcement being made on the first US business
day of the month and the second one being made at least ten US business days prior to the last US business
day of the month. All GICS changes announced in a given month will be implemented as of the close of thelast US business day of the month.

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Standard Index Series Methodology|November 2007

Appendices

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Appendix I: Country Classification of Securities
This appendix outlines the guidelines MSCI Barra uses to determine the country classification of equity
securities.
General framework
Each of the securities followed in the MSCI index universe is classified in one and only one country.
The country classification of a security is generally determined by the country of incorporation of the issuing
company and the primary listing of the security. This approach determines the country classification of thevast majority of securities.
In the few cases where a company is incorporated in one country while its securities have a primary listing ina different country, additional factors need to be considered to determine the country classification.
Companies may choose to incorporate in a different country than the country of primary listing to benefit
from tax, legal, and/or regulatory advantages. These companies often incorporate in countries with limited, if
any, public domestic equity markets, such as the Bahamas, Bermuda, British Virgin Islands, Cayman Islands,
Channel Islands, Luxembourg, Marshall Islands, Netherlands Antilles, and Panama. In some other cases,
companies may seek to benefit from tax, legal and/or regulatory advantages by incorporating in a different
country than their country of primary listing where such country of incorporation is one of the countries in
the MSCI All Country World Index (ACWI). In both of these cases of special benefit incorporations, MSCI
Barra will generally classify the company in the country of the primary listing of its securities.
Companies incorporated outside of the US which have their securities’ primary listing in the US may be
included in the USA index universe, provided that they file a Form 10-K/10-Q.
Companies incorporated in a European Developed Market country (including Luxembourg) which have theirsecurities’ primary listing in a different European Developed Market country are generally classified in the
country of primary listing.
Other cases
In the few remaining cases where the general framework proves to be insufficient, an additional analysis may
be performed to determine the company’s country classification. In such circumstances, MSCI Barra uses a
set of rules, the most important of which are:••••

The company's primary listing, secondary listings, if any, and the geographic distribution of its
shareholder base;
The geographical distribution of its operations (in terms of assets and production);
The location of its headquarters; andThe country in which investors consider the company to be most appropriately classified.

The outcome of that analysis may lead to some companies not being eligible for any MSCI country index if
the country of classification resulting from the analysis remains different from the country of listing. This may
happen in particular, but not exclusively, for companies incorporated in an Emerging Market country and
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Standard Index Series Methodology|November 2007
having their only listing in a Developed Market country.
Country specific cases
China, Russia, and Israel have a number of large companies incorporated within them but with securities
listed only outside of them. MSCI Barra considers such companies for inclusion in the index universe of thecountry of incorporation subject to the following:
Israel: The MSCI Israel universe includes companies incorporated in Israel with a listing on either the TelAviv Stock Exchange or a US stock exchange.
Russia: The MSCI Russia universe includes companies incorporated in Russia with a listing in either Russia,
London or New York. Companies with incorporation in a special benefit country, as described above, mayalso be included in the Russia universe if they have a listing in Russia.
China: The MSCI China universe includes companies incorporated in the People’s Republic of China (PRC)
and listed in the form of B shares on the Shanghai Stock Exchange (in US$) or Shenzhen Stock Exchange (inHK$), or H shares in Hong Kong (in HK$). The MSCI China universe also includes companies notincorporated in the PRC or the Hong Kong Special Administrative Region, provided that they satisfy both of
the following conditions:••

The company is listed on the Hong Kong Stock Exchange; andThe company’s majority shareholders (directly or indirectly) are at least one of the following:o organizations or enterprises owned by the state, provinces, or municipalities of the PRC, orcompanies incorporated in the PRC, oro PRC individuals.

The MSCI China universe excludes companies which satisfy these two conditions but derive more than 80%of their revenues and profits from the Hong Kong Special Administrative Region. Those companies will be
included in the MSCI Hong Kong universe.
Change of Incorporation
In the event that a company that is already classified in one of the countries in the MSCI All Country World
Index (ACWI) changes its incorporation to another country, it generally will remain in the initial country ofclassification. However, it may be re-classified if the company’s geographical profile fundamentally differs
following the reincorporation.
A change in the country classification of a company generally takes place at a Semi-Annual Index Review,
except if the change is the result of a corporate event. In that case the company may be reclassified
simultaneously with the change in country of incorporation or at a Quarterly Index Review following thecorporate event.
When MSCI Barra changes a company's country classification, the company’s equity securities are notautomatically included in the index of the new country classification even if the company was a constituent of
its original country's index. The securities would have to meet all constituent selection criteria for the index of
the new country.
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Standard Index Series Methodology|November 2007
Review and Maintenance
MSCI Barra periodically reviews the country classification of companies not classified into their country ofincorporation. MSCI Barra also periodically reviews the status of stock exchanges and/or market sections todetermine whether securities listed on such exchanges or sections will become part of the universe.

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Appendix II: Free Float Definition and Estimation Guidelines
MSCI Barra defines the free float of a security as the proportion of shares outstanding that is deemed to beavailable for purchase in the public equity markets by international investors. In practice, limitations on theinvestment opportunities available to international institutional investors include:•••

Strategic and other non-free float shareholdings: Stakes held by private or public shareholders
whose investment objectives or other characteristics suggest that those holdings are not likely to beavailable in the market. In practice, disclosure requirements generally do not permit a clear
determination of these investment objectives. Therefore, MSCI primarily classifies shareholdings as
free float or non-free float based on a categorization of investor types into non-strategic and strategic
respectively.
Limits on share ownership for foreign investors: Limits on the proportion of a security’s sharecapital that is authorized for purchase by non-domestic investors. Where they exist, these foreign
share-ownership limits are set by law, government regulations, company by-laws and otherauthoritative statements.
Other foreign investment restrictions: Investment restrictions, other than those described above,
which materially limit the ability of international investors to freely invest in a particular equity
market, sector or security. There is typically no simple way to account for these limitations in abenchmark, as these restrictions tend to be more subtle and complex, and may affect different market
participants in different ways.

Classification of Shareholder Types

STRATEGIC SHAREHOLDER TYPES (NON-FREE FLOAT)
Governments
Shareholdings owned by governments and affiliated entities
are generally classified as non-free float.

6

Companies

Shares owned by companies. This includes treasury shares
owned by the company itself.3

Banks

Shareholdings by banks are considered as strategic, excluding
shareholdings held in trust on behalf of third parties that are
deemed to be non-strategic. (Shareholding by Trust banks inJapan are considered non-strategic).

Treasury3 For most countries, treasury shares are generally included in the total shares outstanding used forin the calculationof the indices, and therefore they are takenMSCI Barra takes them into account in theits calculation of free float. Alternatively,
treasury shares can be taken outIn other countries, where treasury shares are excluded from the determination of the total
security shares outstanding used for the calculation of the indices and therefore, they are accordingly not taken into
consideration for the free float calculation.
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Standard Index Series Methodology|November 2007
Principal officers
board members

and Shares owned by the company’s principal officers or membersof the Board of Directors, including shares owned byindividuals or families that are related to or closely affiliatedwith the company’s principal officers, members of the Boardof Directors, or founding members deemed to be insiders.

STRATEGIC SHAREHOLDER TYPES (NON-FREE FLOAT)
Employees
Shares of the employing companies, held by both officers andnon-officers, which are held in a variety of ways including
plans sponsored by the employer for the purpose ofretirement and savings plans, incentive compensation
programs and other deferred and employee pension funds.
NON-STRATEGIC SHAREHOLDER TYPES (FREE FLOAT)
Individuals
Shares owned by individuals, excluding shares owned byindividuals or families that are related to or closely affiliatedwith the company’s principal officers or members of theBoard of Directors or founding members deemed to beinsiders, and, also excluding those shareholdings held byindividuals, the significant size of which suggests that they are
strategic in nature.
Investment funds, mutual Shares owned in investment funds, mutual funds and unit
funds and unit trusts
trusts, including shares owned in passively managed funds.
Security brokers

Pension funds
Insurance companies

Social security funds

Non-strategic interests held by broker dealers (e.g., trades in
the process of settlement, holdings in the process of beingtransferred, as part of underwriting activity etc), unless held
within the same group or the nature of holding is deemedstrategic.
Shares owned in employee pension funds, excluding shares ofthe employing company, its subsidiaries or affiliates.
In principle, all stakes held by insurance companies are part offree float. For exceptions to this general principle, please referto the additional discussion on insurance companies presented
below.
Shares owned in social security funds, unless the fund’s
management is deemed to exert influence over the
management of the company.

In the event that the above categories should not appropriately capture the nature of a specific shareholding,its classification as free float or non-free float will be determined based on a more extensive analysis.

Special Cases

The following guidelines will be applied in analyzing the special cases set forth below:
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Standard Index Series Methodology|November 2007•

Nominees or trustees: Shareholdings registered in the name of a nominee or trustee are classified as
strategic or non-strategic based on an analysis of who the ultimate beneficial owner of the shares is,according to the shareholder types described above.

•

Government agencies and government-related investment funds: Shareholdings of government
agencies and government-related investment funds are classified based on an analysis of the objectiveof the investment and the extent of government involvement in managing the companies.

•

Insurance companies: Shareholdings by insurance companies are considered as non-free float,
when analysis shows that these holdings are unlikely to be made available as free float in the market.
This analysis typically looks at the nature of the insurance business in each country, a company's
business practices with its group-related or other companies, and the regulatory environment in the
country, including fiscal incentives. These factors, individually or combined, could restrict theinsurance company's shareholdings from being made freely available in the stock market. Therefore,
the treatment of stakes held by insurance companies may differ from country to country. Because of
the structure of equity ownership and the importance of financial alliances for the control ofcompanies in some countries, insurance companies’ stakes in other companies may be treated as
strategic. This is the case in France, Germany, Italy and Japan, where stakes above 2% (FR, DE, IT)
and above 5% (JP) are treated as strategic.

•

Depository Receipts: Shares that are deposited to back the issuance of depository receipts such as
ADRs and GDRs are classified as non-strategic, unless it is established that a specific stake held in
depository receipts is strategic in nature.

•

Shares with "loyalty" incentives: In a public offering, special incentives are sometimes provided toretail investors and are subject to a minimum holding period. These shares will not be considered aspart of the free float during the minimum holding period if the incentives are deemed to be material.
In general, a conditional share bonus in a ratio of 1 to 5 (or an equivalent price discount of 1/6th), or
more, will be considered as material.
• Lock-up periods: Any shares that are subject to lock-up periods will be considered as non-free float
during the lock-up period. At the end of the lock-up period, these shares will be classified as strategic
or non-strategic based on the nature of the shareholder.

Foreign Ownership Limits (FOLs)
For the determination of the FOLs, the following guidelines are used:•

For companies that impose ownership restrictions for non-European Union investors, such
restrictions are fully taken into account in the calculation of the FOL.

•

Regulatory requirements governing the ownership of shares by foreign investors in the country where
the security is included•

In countries where companies are allowed to issue depository receipts such as ADRs or GDRs in
exemption of the outstanding foreign ownership restrictions, the FOL calculation includes the

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Standard Index Series Methodology|November 2007
percentage represented by the depository receipts.
•

Similarly, if a company exceptionally permits certain foreign shareholders to own shares in excess ofthe maximum stated in the company's by-laws and the exception is publicly disclosed, this is taken
into account in the calculation of the FOL.

•

When a company's foreign ownership restriction is defined as a proportion of the company's total
share capital and the company has multiple listed share classes with no specific limit set for any one
class, MSCI applies the company's FOL equally to each of the company's listed share classes.

•

When a company's foreign ownership restriction is defined as a proportion of the company's total
share capital and the company has multiple share classes but only one is listed, MSCI calculates the
FOL by applying the total shares available to foreign investors (after taking into consideration foreign
non-free float shareholdings of non-listed shares, if any) on the listed shares only.

Example:Calculating Foreign Ownership Limit (FOLs)
Number of shares outstanding
Foreign non-free float shareholdings
Foreign ownership limit applied to the company
Foreign Ownership Limit (FOL) applied to listed shares

Listed500

Non-Listed
500
100

Total
1,000
100

= 40%
= ((0.40*1,000) – 100)/500= 0.60Treatment of Non-Voting Depository Receipts in Thailand
As part of the Capital Market Development Plan, the Securities and Exchange Commission of Thailand set
up Non-Voting Depository Receipts (NVDRs) to improve the investability of the Thai capital market.
NVDRs are depository receipts issued by the Thai NVDR Company Limited, a subsidiary of the Stock
Exchange of Thailand (SET) and backed by shares listed on the SET. NVDRs entitle their holders to all
financial benefits of the underlying shares, except voting rights.
Foreign ownership limits that apply to common shares do not apply to NVDRs, and therefore the NVDR
scheme may allow foreign investors to own a greater percentage of shares than the foreign ownership limit ofcertain companies. NVDRs are traded as local shares and as such, investors can buy and sell them throughthe local price counter.
MSCI Barra will consider increasing the weight of companies that are existing constituents of the MSCI
Thailand Index, that also have sizeable NVDRs. Sizeable NVDRs are defined as those representing at least 5
per cent of the existing constituent’s total outstanding company number of shares and must represent at least
the minimum size for addition in Thailand as defined in Appendix IV.
MSCI Barra will recognize NVDRs as securities based on the local price. The calculation of Foreign
Ownership Limit (FOL) and Foreign Inclusion Factor (FIF) will differ in the following scenarios:
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Standard Index Series Methodology|November 2007
1. Existing Constituent Included with the Local Price
When an existing constituent of the MSCI Standard Thailand Index is included with the local price, MSCI
Barra includes the portion of NVDRs issued at the time of the review in the calculation of the Foreign
Ownership Limit (FOL), for the existing constituents.
The Foreign Inclusion Factor (FIF) is equal to the lesser of:•

Estimated free float available to foreign investors, where the FOL used in the calculation follows
the same definition described above:- Rounded up to the closest 5%, if the free float is greater than 15%,
- Rounded to the closest 1%, if the free float is less than 15%.
- FOL rounded to the closest 1%, where the FOL is calculated as the sum of the foreign
ownership limits as defined in the company’s bylaws or regulations rounded to the closest 1%
and NVDRs in issue as a proportion of total outstanding company number of shares rounded
to the closest 1%.

2. Existing Constituent Included with the Foreign Price
When an existing constituent of the MSCI Thailand Index Series is included with the foreign price, MSCI willaccount for the NVDRs in the index separately as securities based on the local price while maintaining theexisting constituent with the foreign price. The Foreign Inclusion Factor (FIF) of the local price security isequal to the portion of NVDRs issued at the time of the review rounded to the closest 1%:
As FIF changes related to NVDR reviews are applied in the indices on a semi-annual basis, the review ofinclusions or removals of NVDRs occurs on a semi-annual basis to coincide with the May Annual Full
Country Index Review and November Quarterly Index Review.
Example:Calculating Foreign Inclusion Factor (FIF) and Foreign Ownership Limit (FOL) for an Existing Constituent
included with the Local Price in the MSCI Thailand Index Series with Sizeable NVDRs:
Company A
Company B
Company C
Total number of shares outstanding
10,000,000
10,000,000
10,000,000
All shares classified as non-free float
4,000,000
4,000,000
4,000,000- those held by foreign investors as strategic
1,000,000
100,000
Total non-free float shareholdings (%)
40.0
40.0
40.0
Free float (%)
60.0
60.0
60.0
Foreign ownership limit as defined by the company (%)
Percentage of NVDRs issued
Foreign Ownership Limit (%)
Foreign strategic shareholding (%)
Foreign Ownership Limit less the foreign
strategic shareholding (%)

33.3
20.0
53.3
10.0

33.3
20.0
53.3
-

33.3
20.0
53.3
1.0

43.3

53.3

52.3

Foreign Inclusion Factor (FIF)
Market price ($)
Full market capitalization ($mm)

0.45
500

0.53
500

0.53
500

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5,000

5,000

Standard Index Series Methodology|November 2007
Free-float adjusted market capitalization ($mm)

2,250

2,650

2,650

Securities affected by Other Foreign Ownership Restrictions
In the case where other foreign investment restrictions exist, which materially limit the ability of international
investors to freely invest in a particular equity market, sector or security, a Limited Investability Factor (LIF)
may be applied to ensure that the investability objectives of the MSCI Indices can be achieved.
There is typically no simple way to account for these types of investability limitations in a benchmark, as theytend to be subtle and complex, and may affect different market participants in different ways.
For example, such restrictions may involve a complex process of investor validation and qualification,
restrictions on funds transfer, individual investment quota limits and various complex administrativerequirements. While instituted at a country level these restrictions may have different consequences
depending on the characteristics of the investor, including legal status, size of assets under management ordate of application.
In the case of individual companies with Foreign Ownership Limits, it may happen that the maximum
ownership by non-national investors is reached while depository receipts may continue to be available toforeign investors. In such cases, the depository receipts typically trade at a persistent premium relative to thedomestic shares, highlighting the difficulties for international investors to replicate the security’s weight in theindex.
Therefore, where deemed necessary, a LIF will be determined and applied based on an extensive case-by-caseanalysis. The application of this LIF permits a more accurate comparison of constituent markets andsecurities that have more complex and subtle restrictions on the investment process to markets and securities
where investment limitations can be appropriately reflected in their standard FIFs.

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Appendix III: Global Industry Classification Standard (GICS)
Introduction
The Global Industry Classification Standard (GICS) was developed by MSCI in collaboration with Standard& Poor’s (S&P) to provide an efficient, detailed and flexible investment tool. It is designed to respond to theglobal financial community’s need for a global, accurate, complete and widely accepted approach to defining
industries and classifying securities by industry. Its universal approach to industry classification aims to
improve transparency and efficiency in the investment process.
Key Features of GICS
The key features of GICS are that it is:••••

Universal: the classification applies to companies globally.
Accurate: the structure precisely reflects the state of industries in the equity investment universe.
Flexible: the classification consists of four levels of analysis, ranging from the most general to themost specialized sub-industry.
Evolutionary: annual reviews are conducted to ensure that the classification remains fully
representative of the universe.

To provide the level of precision critical in the investment process, GICS is designed with four levels ofclassifications:
The Global Industry Classification Standard (GICS)
10 Sectors

24 Industry Groups

67 Industries

147 Sub-Industries

GICS has 10 sector classifications:• Energy• Materials• Industrials• Consumer Discretionary• Consumer Staples• Health Care
• Financials• Information Technology
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Standard Index Series Methodology|November 2007••

Telecommunication Services
Utilities.

Philosophy and Objectives of GICS
The way in which securities are classified into asset classes forms the basis of many important investment
decisions. The relative merits of each security are judged primarily within these asset classes, and investment
decisions are taken within this framework.
Approaches to Industry Classification Schemes
While grouping securities by country and regions is relatively straightforward, classifications by industries are
more difficult. There are many approaches to developing industry classification schemes, some of which are
discussed below.
At one extreme is the purely statistical approach, which is solely financial market-based and backward
looking, using past returns. Aggregations are formed around correlation, often yielding non-intuitive
groupings that are dissimilar across countries and regions. Another approach attempts to define a priori
financial market-oriented groups or themes, such as cyclical, interest rate sensitive, etc. The difficulty,
however, lies in finding widely accepted and relatively stable definitions for these themes.
Two other approaches begin with an economic perspective on companies. The first focuses on a production
orientation while the other adopts a market or demand orientation in company analysis. The productionoriented approach was effective in the past in its analysis of the microstructure of industries from theproducers’ standpoint. For instance, it segregated goods and services on the premise that it was a different setof companies that provided each to consumers. As the structure of the global economy evolved, limitationsof this approach became increasingly obvious. The ever-increasing share of discretionary income brought
about by economic development, emergence of the service era, and the availability and accessibility of
information with the advent of new communication technology has moved the emphasis from producers to
consumers.
GICS: Market Demand-Oriented
The Global Industry Classification Standard (GICS) is designed to be market demand-oriented in its analysis
and classification of companies. For example, drawing the line between goods and services is becoming
increasingly arbitrary as they are now commonly sold together. This distinction between goods and services isreplaced by adopting the more market-oriented sectors of “Consumer Discretionary” and “Consumer
Staples”, which group goods and services sub-industries. In addition, the creation of large stand-alone sectors
such as Health Care, Information Technology and Telecommunication Services accurately represents
industries that provide significant value to the consumer in today’s global and integrated economy. Thisfurther contributes to a more uniform distribution of weights among the 10 sectors.

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Standard Index Series Methodology|November 2007
GICS Company Classification
The Global Industry Classification Standard (GICS) is used to assign each company to a sub-industry
according to its principal business activity. Since the GICS is strictly hierarchical, a company can only belong
to one grouping at each of the four levels.
An Illustration of the GICS – Telecommunication Services Sector:
50 – Telecommunication

5010 – Telecommunication

501010 - Diversified

50101010 – Alternative

501020 – Wireless

50101020 – Integrated
50102010 – WirelessCable & Wireless (GB)

AT&T (US)Vodafone Group (GB)Classification by Revenue
In order to provide an accurate, complete and long-term view of the global investment universe, a company’s
revenues often provide a more stable and precise reflection of its activities than earnings. Furthermore,industrial and geographical breakdowns of revenues are more commonly available than earnings broken
down the same way for most companies. Nevertheless, company valuations are more closely related toearnings than revenues. Therefore, earnings remain an important secondary consideration in a company’s
industry classification.
General Guidelines for Classification
The primary source of information used to classify securities is a company’s annual reports and accounts.
Other sources include brokers’ reports and other published research literature. As a general rule, a company
is classified in the sub-industry whose definition most closely describes the business activities that generate atleast 60% of the company’s revenues.
Example: Nokia (FI)2005 Results Mobile Phones Multimedia Enterprise Solutions Networks
Revenues
61%
17%
3%
19%
Earnings
72%
17%
0%
17%

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Standard Index Series Methodology|November 2007
Classified as:
GICS Level

GICS Code

Code Description

Sector45

Information Technology

Industry Group4520

Technology Hardware & Equipment

Industry

452010Communications Equipment

Sub-Industry

45201020

Communications Equipment

However, a company engaged in two or more substantially different business activities, none of which
contribute 60% or more of revenues, is classified in the sub-industry that provides the majority of both thecompany’s revenues and earnings. When no sub-industry provides the majority of both the company’s
revenues and earnings, the classification will be determined based on further MSCI research and analysis. In
addition, a company significantly diversified across three or more sectors, none of which contributes the
majority of revenues or earnings, is classified either in the Industrial Conglomerates sub-industry (Industrial
Sector) or in the Multi-Sector Holdings sub-industry (Financials Sector).
Example: General Electric (US)2005 Results
Revenues
Earnings

Infrastructure29%
33%

Industrial
23%
11%

Healthcare
10%
11%

NBC Universal
10%
13%Commercial Finance
14%
18%

Consumer Finance13%
13%Classified as:
GICS Level

GICS Code

Code Description

Sector20

Industrials

Industry Group2010

Capital Goods

Industry

201050Industrial Conglomerates

Sub-Industry

20105010

Industrial Conglomerates

In the case of a new issue, the classification will be determined based primarily on the description of thecompany’s activities and pro forma results as given in the prospectus.
Review of Sub-Industry Classification
A company’s sub-industry classification will be reviewed either when a significant corporate restructuring
occurs or when a new annual report is available. In order to provide a stable sub-industry classification, whenreviewing a company’s classification, changes will be minimized in the sub-industry classification to the extent
possible by disregarding temporary fluctuations in the results of a company’s different activities.
In the event that the above guidelines should not appropriately capture a particular company’s businessactivity, its classification will be determined based on more extensive analysis.

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Standard Index Series Methodology|November 2007
GICS (Global Industry Classification Standard)
Effective after close of business (US, EST) Friday April 28, 2006
SectorIndustry Group

Industry

Sub-Industry

10 - Energy

1010 - Energy

101010 - Energy Equipment & Services

10101010 - Oil & Gas Drilling
10101020 - Oil & Gas Equipment & Services
10102010 - Integrated Oil & Gas
10102020 - Oil & Gas Exploration & Production
10102030 - Oil & Gas Refining & Marketing
10102040 - Oil & Gas Storage & Transportation
10102050 - Coal & Consumable Fuels
15101010 - Commodity Chemicals
15101020 - Diversified Chemicals
15101030 - Fertilizers & Agricultural Chemicals
15101040 - Industrial Gases
15101050 - Specialty Chemicals
15102010 - Construction Materials
15103010 - Metal & Glass Containers
15103020 - Paper Packaging
15104010 - Aluminum
15104020 - Diversified Metals & Mining
15104030 - Gold
15104040 - Precious Metals & Minerals
15104050 - Steel
15105010 - Forest Products
15105020 - Paper Products
20101010 - Aerospace & Defense
20102010 - Building Products
20103010 - Construction & Engineering
20104010 - Electrical Components & Equipment
20104020 - Heavy Electrical Equipment
20105010 - Industrial Conglomerates
20106010 - Construction & Farm Machinery & Heavy Trucks
20106020 - Industrial Machinery20107010 - Trading Companies & Distributors
20201010 - Commercial Printing
20201030 - Diversified Commercial & Professional Services
20201040 - Human Resource & Employment Services
20201050 - Environmental & Facilities Services
20201060 - Office Services & Supplies
20301010 - Air Freight & Logistics
20302010 - Airlines
20303010 - Marine
20304010 - Railroads
20304020 - Trucking
20305010 - Airport Services
20305020 - Highways & Railtracks
20305030 - Marine Ports & Services
25101010 - Auto Parts & Equipment
25101020 - Tires & Rubber
25102010 - Automobile Manufacturers
25102020 - Motorcycle Manufacturers
25201010 - Consumer Electronics
25201020 - Home Furnishings
25201030 - Homebuilding
25201040 - Household Appliances
25201050 - Housewares & Specialties
25202010 - Leisure Products
25202020 - Photographic Products
25203010 - Apparel, Accessories & Luxury Goods
25203020 - Footwear
25203030 - Textiles
25301010 - Casinos & Gaming
25301020 - Hotels, Resorts & Cruise Lines
25301030 - Leisure Facilities
25301040 - Restaurants
25302010 - Education Services
25302020 - Specialized Consumer Services
25401010 - Advertising25401020 - Broadcasting & Cable TV
25401030 - Movies & Entertainment
25401040 - Publishing
25501010 - Distributors
25502010 - Catalog Retail25502020 - Internet Retail25503010 - Department Stores
25503020 - General Merchandise Stores
25504010 - Apparel Retail25504020 - Computer & Electronics Retail25504030 - Home Improvement Retail25504040 - Specialty Stores
25504050 - Automotive Retail25504060 - Homefurnishing Retail101020 - Oil, Gas & Consumable Fuels

15 - Materials

1510 - Materials

151010 - Chemicals

151020 - Construction Materials
151030 - Containers & Packaging
151040 - Metals & Mining

151050 - Paper & Forest Products
20 - Industrials

2010 - Capital Goods

201010 - Aerospace & Defense
201020 - Building Products
201030 - Construction & Engineering
201040 - Electrical Equipment
201050 - Industrial Conglomerates
201060 - Machinery2020 - Commercial Services & Supplies2030 - Transportation

201070 - Trading Companies & Distributors
202010 - Commercial Services & Supplies

203010 - Air Freight & Logistics
203020 - Airlines
203030 - Marine
203040 - Road & Rail
203050 - Transportation Infrastructure

25 - Consumer Discretionary

2510 - Automobiles & Components

251010 - Auto Components
251020 - Automobiles

2520 - Consumer Durables & Apparel

252010 - Household Durables

252020 - Leisure Equipment & Products
252030 - Textiles, Apparel & Luxury Goods
2530 - Consumer Services

253010 - Hotels, Restaurants & Leisure253020 - Diversified Consumer Services
2540 - Media

254010 - Media

2550 - Retailing

255010 - Distributors
255020 - Internet & Catalog Retail255030 - Multiline Retail255040 - Specialty Retail

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Standard Index Series Methodology|November 2007
SectorIndustry Group

Industry

Sub-Industry

30 - Consumer Staples

3010 - Food & Staples Retailing

301010 - Food & Staples Retailing

3020 - Food, Beverage & Tobacco

302010 - Beverages

30101010 - Drug Retail30101020 - Food Distributors
30101030 - Food Retail30101040 - Hypermarkets & Super Centers
30201010 - Brewers
30201020 - Distillers & Vintners
30201030 - Soft Drinks
30202010 - Agricultural Products
30202030 - Packaged Foods & Meats
30203010 - Tobacco
30301010 - Household Products
30302010 - Personal Products
35101010 - Health Care Equipment
35101020 - Health Care Supplies
35102010 - Health Care Distributors
35102015 - Health Care Services
35102020 - Health Care Facilities
35102030 - Managed Health Care
35103010 - Health Care Technology
35201010 - Biotechnology
35202010 - Pharmaceuticals
35203010 - Life Sciences Tools & Services
40101010 - Diversified Banks
40101015 - Regional Banks
40102010 - Thrifts & Mortgage Finance40201020 - Other Diversified Financial Services
40201030 - Multi-Sector Holdings
40201040 - Specialized Finance40202010 - Consumer Finance40203010 - Asset Management & Custody Banks
40203020 - Investment Banking & Brokerage
40203030 - Diversified Capital Markets
40301010 - Insurance Brokers
40301020 - Life & Health Insurance
40301030 - Multi-line Insurance
40301040 - Property & Casualty Insurance
40301050 - Reinsurance
40402010 - Diversified REIT's
40402020 - Industrial REIT's
40402030 - Mortgage REIT's
40402040 - Office REIT's
40402050 - Residential REIT's
40402060 - Retail REIT's
40402070 - Specialized REIT's
40403010 - Real Estate Management & Development
45101010 - Internet Software & Services
45102010 - IT Consulting & Other Services
45102020 - Data Processing & Outsourced Services
45103010 - Application Software
45103020 - Systems Software
45103030 - Home Entertainment Software
45201020 - Communications Equipment
45202010 - Computer Hardware
45202020 - Computer Storage & Peripherals
45203010 - Electronic Equipment Manufacturers
45203020 - Electronic Manufacturing Services
45203030 - Technology Distributors
45204010 - Office Electronics
45301010 - Semiconductor Equipment

302020 - Food Products
3030 - Household & Personal Products
35 - Health Care

3510 - Health Care Equipment & Svcs

302030 - Tobacco
303010 - Household Products
303020 - Personal Products
351010 - Health Care Equipment & Supplies
351020 - Health Care Providers & Services

4010 - Banks

351030 - Health Care Technology
352010 - Biotechnology
352020 - Pharmaceuticals
352030 - Life Sciences Tools & Services
401010 - Commercial Banks

4020 - Diversified Financials

401020 - Thrifts & Mortgage Finance402010 - Diversified Financial Services

3520 - Pharma., Bio. & Life Sciences
40 - Financials

402020 - Consumer Finance402030 - Capital Markets

45 - Information Technology

4030 - Insurance

403010 - Insurance

4040 - Real Estate404020 - Real Estate Investment Trusts (REITs)

4510 - Software & Services

404030 - Real Estate Management & Development
451010 - Internet Software & Services
451020 - IT Services
451030 - Software

4520 - Technology Hardware & Equipment 452010 - Communications Equipment
452020 - Computers & Peripherals
452030 - Electronic Equipment & Instruments

4530 - Semicondt. & Semicondt. Equip.

452040 - Office Electronics
453010 - Semiconductors & Semiconductor Equipment

50 - Telecommunication

5010 - Telecommunication Services

501010 - Diversified Telecommunication Services

55 - Utilities

5510 - Utilities

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501020 - Wireless Telecommunication Services
551010 - Electric Utilities
551020 - Gas Utilities
551030 - Multi-Utilities
551040 - Water Utilities
551050 - Independent Power Producers & Energy Traders- 45 - of 63

45301020 - Semiconductors
50101010 - Alternative Carriers
50101020 - Integrated Telecommunication Services
50102010 - Wireless Telecommunication Services
55101010 - Electric Utilities
55102010 - Gas Utilities
55103010 - Multi-Utilities
55104010 - Water Utilities
55105010 - Independent Power Producers & Energy TradersStandard Index Series Methodology|November 2007
GICS Structure Review Frequency
MSCI and Standard & Poor’s are committed to ensuring that the GICS structure remains relevant and up-todate. This is accomplished through an annual review of the structure. This review includes a detailed internal
analysis to develop a proposal for potential structural changes and public request for comments and in-depth
client consultations with various market participants as a means of obtaining feedback on proposed structuralchanges.

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Standard Index Series Methodology|November 2007

Appendix IV: Minimum Size Guidelines
Objective
The objective of MSCI is to provide global benchmark equity indices that can serve as relevant and accurate
performance benchmarks, effective research tools, and as the basis for a wide variety of investment vehicles.
MSCI strives to achieve this objective by following some guiding principles in the design and implementationof its index construction and maintenance methodology. One such guiding principle is to construct andmanage the MSCI Equity Index Series such that the indices can be replicated in global institutional portfoliosof meaningful size at a relatively reasonable cost. The replicability of indices requires that constituents in
MSCI Indices be represented at their free float-adjusted, investable weight and that existing constituents or
new securities that are considered for inclusion be of reasonable size and liquidity. The use of free floatadjustment and a broader and deeper industry group representation target of 85% of the free float-adjusted
market capitalization further require that closer consideration be given to the size of existing or potential new
constituents. In many industries and countries, in the absence of an eligible minimum size requirement forinclusion, achieving this broader and deeper level of target market representation could well result in the
inclusion of many small securities, which global institutional investors may find difficult to reflect in theirportfolios in a cost-effective fashion.

Size Distribution and Structure of Markets
The determination of minimum size for inclusion is complicated by the fact that the free float-adjusted
market capitalization or size distributions vary considerably across markets around the world. Thesevariations are caused by differences in the structure of underlying markets. For example, in the case of theUSA, a free float-adjusted market capitalization of $US 1 billion would correspond to the size of the largest
security within the 92nd percentile of the distribution of free float-adjusted market capitalization. Thissecurity’s contribution to US market capitalization would amount to 1.1 basis points. In the case of Japan, a$US 1 billion free float-adjusted market capitalization would correspond to the size of the largest security
within the 78th percentile of the distribution of free float-adjusted market capitalization and its contribution
to the market would amount to 6.9 basis points. This simple example illustrates that a minimum size
threshold of $US 1 billion would be too low in the case of the USA, as it would result in the inclusion of
hundreds of securities with a negligible marginal contribution to the country index. On the other hand, thisminimum size threshold would be too high in the case of Japan, as an 85% target market representation could
only be achieved by including all securities with a free float-adjusted market capitalization of up to $US 1
billion, irrespective of their industry group affiliation. The table below provides the characteristics of asecurity of $US 1 billion free float-adjusted market capitalization in some large developed markets. This table
further highlights the variation of size patterns across countries.

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Standard Index Series Methodology|November 2007

Characteristics of a Security of $US 1 Billion Free Float-Adjusted Market Cap(Data as of December 2002)

Country

Market Size
Free float-adjusted($US bn)

Percentile ofTotal Market 1

Contribution to
Total Market 2(b.p.)

USA
9,277
92
1.1
UK
1,656
92
6.0
Japan
1,452
78
6.9
France576
90
17.4
Switzerland
452
93
22.1
Canada392
81
25.5
Germany356
88
28.1
Netherlands
340
94
29.4
Italy
256
85
39.1
Sweden13276
75.8
Notes:
1
Percentile of free float-adjusted market capitalization in descending order to which the$US 1 billion security belongs
2
Contribution of a $US 1 billion security to the total market

Framework for Determining Minimum Size Guideline
The above example highlights the fact that, given the differences in the structure of underlying markets, a
simple rule that defines the minimum size for inclusion for all markets around the world cannot be designed
to simplify the index construction process. A rigid rule would also introduce unnecessary turnover, potentiallyleading to benchmark instability. Therefore, a careful assessment of what constitutes minimum size forinclusion needs to be made on a country by country basis and/or on the basis of certain country groupings,
based on overall market size or other criteria. In order to develop guidelines for minimum size for inclusion
for various countries and/or country groupings, MSCI has designed a framework for analyzing this issue.
This framework requires a careful analysis and interpretation of different factors, such as:
•
•
•
•
•

The overall free float-adjusted market capitalization of the market.
The distribution of free float-adjusted market capitalization in the country.
The level of market concentration.
The marginal contribution of securities, belonging to different percentiles of the free float-adjusted
market capitalization distribution, to the country index.
Other relevant characteristics of the underlying market at the time of decision.

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Standard Index Series Methodology|November 2007
Minimum Size Guidelines for Inclusion
Based on the framework described above, the following minimum size thresholds for inclusion wereconsidered appropriate for the different countries and country groupings shown below. These thresholds
were updated and based on market data as of December 2005, and they were applied in the annual fullcountry index review in May 2006. They remain applicable until further notice. Note that in the table below,
countries within the same minimum size threshold are ranked by order of decreasing index market
capitalization using data as of April 2006.
Eligible Minimum Size Threshold for Inclusions of New Securities (Free Float-Adjusted Market
Capitalization) May 2006
DM Countries
USA

US

Minimum Size
(USD mm)
3,000

UNITED KINGDOM

GB

1,800

FRANCEGERMANYSWITZERLAND
ITALY
SPAIN
NETHERLANDS

FR
DE
CH
IT
ES
NL

1,600
1,600
1,600
1,600
1,600
1,600

JAPAN
CANADA
AUSTRALIA

JP
CA
AU

1,300
1,300
1,300

SWEDENHONG KONG
FINLANDBELGIUMNORWAYIRELAND
DENMARKGREECE
AUSTRIAPORTUGAL

SE
HK
FI
BE
NO
IE
DK
GR
AT
PT

800
800
800
800
800
800
800
800
800
800

SINGAPORE
NEW ZEALAND

SG
NZ

600
600

EM Countries
KOREA
TAIWANBRAZIL
SOUTH AFRICARUSSIAMEXICO

KR
TW
BR
ZA
RU
MX

Minimum Size
(USD mm)
600
600
600
600
600
600

CHINA
INDIA
ISRAEL

CN
IN
IL

400
400
400

MALAYSIA
TURKEYTHAILANDINDONESIAPOLANDCHILEHUNGARYCZECH REPUBLIC

MY
TR
TH
ID
PL
CL
HU
CZ

250
250
250
250
250
250
250
250

ARGENTINA
EGYPT
PERU
PHILIPPINESCOLOMBIAPAKISTAN
MOROCCOJORDAN

AR
EG
PE
PH
CO
PK
MA
JO

150
150
150
150
150
150
150
150

VENEZUELASRI LANKA

VE
LK

50
50

Users of MSCI Indices should view the minimum size thresholds for securities in various countries andcountry groupings presented above with caution. In general, index guidelines are subject to review asunderlying market conditions change and are less rigid than index rules. In particular, the minimum size
thresholds are somewhat time-dependent. MSCI has a policy of periodically reviewing the minimum size
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Standard Index Series Methodology|November 2007
thresholds, at the time of its regularly scheduled annual full country index review.

Minimum Size Guidelines for Early Inclusion of new securities outside a Quarterly
Index Review (please refer to section 3.4.3.1)
In order to qualify for other early inclusions, a security must meet the index constituent eligibility rules
and guidelines described in Section 2.4.1 and have a free float-adjusted market capitalization of at least 4
times the minimum size guidelines for inclusion. Please note that countries within the same minimum size
threshold are ranked by order of decreasing index market capitalization using data as of April 2006.
Eligible Minimum Size Threshold for Early Inclusions of New Securities (Free Float-Adjusted
Market Capitalization) May 2006
DM Countries
USA

US

Minimum Size
(USD mm)12,000

UNITED KINGDOM

GB

7,200

FRANCEGERMANYSWITZERLAND
ITALY
SPAIN
NETHERLANDS

FR
DE
CH
IT
ES
NL

6,400
6,400
6,400
6,400
6,400
6,400

JAPAN
CANADA
AUSTRALIA

JP
CA
AU

5,200
5,200
5,200

SWEDENHONG KONG
FINLANDBELGIUMNORWAYIRELAND
DENMARKGREECE
AUSTRIAPORTUGAL

SE
HK
FI
BE
NO
IE
DK
GR
AT
PT

3,200
3,200
3,200
3,200
3,200
3,200
3,200
3,200
3,200
3,200

SINGAPORE
NEW ZEALAND

SG
NZ

2,400
2,400

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EM Countries
KOREA
TAIWANBRAZIL
SOUTH AFRICARUSSIAMEXICO

KR
TW
BR
ZA
RU
MX

Minimum Size
(USD mm)
2,400
2,400
2,400
2,400
2,400
2,400

CHINA
INDIA
ISRAEL

CN
IN
IL

1,600
1,600
1,600

MALAYSIA
TURKEYTHAILANDINDONESIAPOLANDCHILEHUNGARYCZECH REPUBLIC

MY
TR
TH
ID
PL
CL
HU
CZ

1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000

ARGENTINA
EGYPT
PERU
PHILIPPINESCOLOMBIAPAKISTAN
MOROCCOJORDAN

AR
EG
PE
PH
CO
PK
MA
JO

600
600
600
600
600
600
600
600

VENEZUELASRI LANKA

VE
LK

200
200

Standard Index Series Methodology|November 2007
Minimum Size Guidelines for inclusion of new securities during a Quarterly Index
Review
As mentioned in Section 3.2.1, securities may be added to a country index during a quarterly index review fora variety of reasons, including under-representation of one or more industry groups following mergers,
acquisitions, restructuring and other major market events affecting that industry group and changes inindustry classification.
In addition to these reasons, MSCI takes into account other factors such as the free float-adjusted market
capitalization of the security in order to decide if the security can be added to the indices. In general, MSCI
considers for inclusion at a quarterly index review, those securities that represent at least two times theminimum size guideline for inclusion. The minimum size guideline for inclusion is given earlier in thisAppendix. The objective of this guideline is to minimize the number of additions and to reflect only
significant changes in quarterly index reviews.

Minimum Size Guidelines for Deletions and for Spin-Offs
Deletions due to small size can be carried out at the time of the annual full country index review and thequarterly index reviews. As a matter of policy, the minimum size guideline for deletions at the time of theannual full country index review is set at 50% of the eligible minimum size threshold for inclusions. Outsideof the annual full country index review, such as the quarterly index review, a security will be deleted if its free
floated-adjusted market capitalization is significantly below the minimum size guidelines for deletions.
In addition, the minimum size guidelines for deletions are used for spun-off securities as spin-offs can beconsidered as deletions of part of existing index constituents. Consequently, securities spun-off from existing
constituents within the same country may be considered for inclusion at the time of the event if the security
spun-off has an estimated free float-adjusted market capitalization representing at least 50% of the eligible
minimum size threshold for inclusion of the country. Securities spun-off from existing constituents in adifferent country may be considered for early inclusion at the time of the event if the security spun-off has an
estimated free float-adjusted market capitalization representing the minimum size for inclusion of the country
in which the spun-off security belongs.

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Standard Index Series Methodology|November 2007

Appendix V: Index Reviews During Transition Period
May 2007 Annual Full Country Index Review of the Standard Indices
In order to minimize reverse turnover, the May 2007 Annual Full Country Index Review for the Standard
Indices used the same Global Minimum Size Requirement and other investability requirements that will beapplied in the construction and maintenance of the Provisional Standard Indices. Only securities that are
constituents of the Provisional Standard Indices will be added to the Standard Indices to bring the Industry
Group representation closer to 85%, if necessary.

August 2007 Quarterly Index Review
In August 2007, the first QIR for the Provisional Standard Indices will be conducted under the principles of
the Global Investable Market Indices methodology. Newly eligible companies that will be included in theProvisional Standard Indices as a result of the August 2007 QIR will also be added to the existing Standard
Indices as of the close of August 31, 2007. The migrations of companies between the Provisional Standard
and Provisional Small Cap Indices will also be reflected in the Standard and Small Cap Indices.

November 2007 Quarterly Index Review
In November 2007, the first SAIR for the Provisional Standard Indices will be conducted under the
principles of the Global Investable Market Indices methodology. The addition or deletion of one-half thedifference in each constituent’s free float-adjusted market capitalization between the existing Standard Indicesand the corresponding Provisional Standard Indices will be implemented in the Standard Indices as of theclose of November 30, 2007.

February 2007 Quarterly Index Review
In February 2008, the second QIR for the Provisional Standard Indices will be conducted under the
principles of the Global Investable Market Indices methodology. Newly eligible companies that will be
included in the Provisional Standard Index as a result of the February 2008 QIR will also be added to theStandard Index as of the close of February 29, 2008. The migration of companies between the Provisional
Standard and Provisional Small Cap Indices will also be reflected in the Standard and Small Cap Indices.

May 2008 Semi-Annual Index Review
In May 2008, the second Semi-Annual Index Review for the Provisional Standard Indices will be conductedunder the principles of the Global Investable Market Indices methodology. The addition or deletion of theremaining difference of the free float-adjusted market capitalization for each constituent will be implemented
in the Standard Indices as of the close of May 30, 2008. After this, the Provisional Indices will be
discontinued.

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Standard Index Series Methodology|November 2007
Minimum Size Guidelines for Deletions
While the Global Minimum Size Requirement for the Provisional Standard Indices is used to determine theadditions to the MSCI Standard Index Series, the following minimum size thresholds are used for deletions in
the different countries and country groupings shown below. These thresholds were updated and based onmarket data as of December 2006, and they were applied in the annual full country index review in May 2007.
They remain applicable until further notice. Note that in the table below, countries within the same minimum
size threshold are ranked by order of decreasing index market capitalization using data as of April 2006.

USA

US

Minimum Size
(USD mm)
1400

UNITED KINGDOM
SPAIN

GB
ES

1300
1300

FRANCEGERMANYSWITZERLAND
ITALYNETHERLANDS

FR
DE
CH
IT
NL

JAPAN
CANADA
AUSTRALIADM Countries

Minimum Size
(USD mm)

EM Countries
BRAZILRUSSIA
SOUTH AFRICAMEXICO

BR
RU
ZA
MX

500
500
500
500

1200
1200
1200
1200
1200

KOREA
CHINA
INDIA

KR
CN
IN

400
400
400

TAIWAN

TW

350

JP
CA
AU

800
800
800

SWEDENHONG KONG
FINLANDBELGIUMNORWAY
DENMARKIRELAND
AUSTRIAGREECEPORTUGAL

SE
HK
FI
BE
NO
DK
IE
AT
GR
PT

600
600
600
600
600
600
600
600
600
600

MALAYSIAISRAELSAUDI ARABIAPOLANDCHILE
INDONESIA
TURKEYTHAILANDHUNGARYCZECH REPUBLIC

MY
IL
SA
PL
CL
ID
TR
TH
HU
CZ

200
200
200
200
200
200
200
200
200
200

SINGAPORE
NEW ZEALAND

SG
NZ

500
500

EGYPT
ARGENTINAPERUPHILIPPINES
MOROCCO

EG
AR
PE
PH
MA

125
125
125
125
125

KUWAITUAE
QATAR
COLOMBIAPAKISTANJORDAN

KW
AE
QA
CO
PK
JO

100
100
100
100
100
100

BAHRAIN
OMAN

BH
OM

50
50

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Standard Index Series Methodology|November 2007

Appendix VI: Gulf Cooperation Council Countries
Methodology used to construct the MSCI GCC Countries Indices
The methodology used to construct the MSCI GCC Countries indices is similar, but not identical, to theStandard Index Series methodology. Securities are selected for inclusion targeting an 85% free float-adjusted
market representation level within each industry group, within each country. Securities must satisfy predetermined minimum size guidelines and must have a free float of at least 15%. The MSCI GCC Countries
Indices are reviewed on an annual and quarterly basis in February, May, August and November. The May
Annual Index Review is intended to systematically re-assess the various dimensions of the equity universe forall countries, while the quarterly index reviews are aimed at promptly reflecting other significant market
events.
The difference with the methodology for the Standard Indices lies in the fact that the selection of securities is
initially done for the domestic indices, i.e., from the perspective of domestic investors. In order to do that,the eligible universe is free float-adjusted by the Domestic Inclusion Factor (DIF) and the selection of
securities for the domestic country indices is carried out in that context. The constituents of the nondomestic country indices are then derived from the domestic indices; however the market capitalization of asecurity is adjusted by the Foreign Inclusion Factors (FIF), which incorporates the Foreign Ownership Limit(FOL). The FOL applied to the GCC countries are based on conditions relevant to international investors
based outside of the GCC countries with the exception of Saudi Arabia where the FOL is based on
conditions relevant to non-domestic investors in other GCC countries.
Please note that these countries are standalone indices and therefore not part of the MSCI Emerging Markets
Index.
Minimum size guidelines
The minimum size guidelines used at construction for the GCC countries’ domestic MSCI Indices are: USD
400 mm for Saudi Arabia, USD 200 mm for United Arab Emirates, Kuwait and Qatar, USD 100 mm for
Bahrain and Oman. These minimum size guidelines represent DIF-adjusted figures.
As Foreign Ownership Limits captured by the FIF-adjustment may significantly decrease the market
capitalization of securities, a minimum size guideline of USD 100 mm ensures that there is also a minimum
size threshold on a FIF-adjusted basis.

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Standard Index Series Methodology|November 2007

Appendix VII: Quarterly and Annual Full Country Index Review Changes
in FIFs
Quarterly Index Review changes in FIF
As stated in section 3.2.2 “Quarterly Index Review Changes in FIFs”, significant changes in free float
estimates and corresponding changes in the FIFs for constituents related to relatively large events arereflected in the indices at the quarterly index reviews.
All FIF changes, such as changes resulting from large market transactions involving strategic shareholders,that are publicly announced (for example transactions made by way of immediate bookbuilding and otherprocesses, or secondary offerings that were not implemented immediately), will be implemented during aquarterly index review provided they satisfy one of the following conditions:•

The absolute size of the FIF change is 0.15 or more, or•

The change in free float-adjusted market capitalization resulting from the FIF change represents at least:
USD 1bn for securities classified in the US
USD 500 mm for securities classified in developed markets other than the US
USD 200 mm for securities classified in the emerging markets

The thresholds above only apply to changes in FIFs at quarterly index reviews.
All FIF changes resulting from an increase in FOL are implemented during a quarterly index review unless a
corporate event takes place during the quarter, in which case the FIF (including the FOL) will be updated at
the time of this event.
Buffer rule for FIF Changes at Quarterly and Annual Full Index Reviews
FIF changes resulting from a change in free float of less than 1% will not be implemented, except in cases ofcorrections.

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Standard Index Series Methodology|November 2007

Appendix VIII: Price Source for Securities
For a full updated list of prices used in MSCI’s end of day index calculations by country, please refer to the
MSCI web site at www.msci.com/standard.
In certain countries significant foreign ownership limits exist for certain companies and/or industries. When
the FOL is reached in these countries, foreign investors may trade with each other in an organized local
market, frequently at a price higher than that available to domestic investors. As a result, there may beseparate domestic and foreign board quotations.
MSCI regularly monitors the relative liquidity and foreign ownership availability of constituents with separate
domestic and foreign board quotations to determine whether prices for these constituents should reflect thedomestic or foreign board quotations. This review occurs on a quarterly basis to coincide with the quarterlyindex review.
Israel and Russia
A number of factors are analyzed in order to determine the most appropriate price source for the MSCI Israel
and Russia Standard Index constituents. The eligible universe includes securities listed on more than one
stock exchange, as well as depositary receipts. These factors include the trading frequency, traded volumes
and traded value on each exchange, amongst others. The price source will be determined independently foreach security. This may result in different price sources for the securities of the same company.
Markets open on Saturday and/or Sunday
In the event that a security is not traded on a Monday but was traded on the previous Saturday and/or
Sunday, this security will have the latter price carried forward to the Monday.

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Standard Index Series Methodology|November 2007

Appendix IX: Policy Regarding Market Closures During Index Reviews
For both quarterly index reviews and the annual full country index review, the following principles apply incase of market closures on the day of implementation. As a reminder, the effective implementation date forquarterly index review is as of the close of the last business day of February, August and November. The
effective implementation date for the annual full country index review is as of the close of the last business
day of May.
Market Closures Due to Scheduled Stock Market Holidays
When a given stock market is closed on the “as of the close of” date due to stock market holiday, the change
will be effective on the next day, using the price of the previous day’s close.
Unexpected Market Closures
In the event that the primary stock market in a country fails to open for trading and remains closed for theentire trading day on the effective implementation date of the review due to an unexpected market closure,
MSCI will, in principle, postpone the review of the MSCI Standard Index Series for that specific country
index. MSCI will implement the country index review affected as of the close of the first business day(Monday to Friday) that the specific market reopens for trading and closing prices are available. In the eventof unexpected closures of stock markets in more than one country, MSCI will evaluate the situation and may
apply a different policy.
For smaller countries, however, in the event of unexpected market closures, MSCI reserves the right toimplement the index review as planned using the closing price of the last day the market was open.
Market Outage during the Trading Day
In the event that a market is affected by an outage during the trading day on the effective implementation
date, MSCI will determine its pricing policy for the relevant country on a case by case basis. In making its
decision, MSCI will take into consideration a number of factors, including the time and duration of theoutage, information on the outage provided by the specific stock exchange, and other relevant market
information.
MSCI will communicate all decisions taken with respect to market outages during the day through the regularclient communication channels as well as via Reuters (Pages MSCIA and following) and Bloomberg (MSCN).
In some exceptional cases, such that stock market holidays in many countries coincide with the “as of theclose of” date, MSCI may decide to move the “as of the close of” date to a more appropriate date. In suchcases, MSCI would announce such a change in advance.

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Standard Index Series Methodology|November 2007

Appendix X: Equity Markets and Universe
The tables below provide a list of Stock Exchanges, Market Segments and Eligible Security Classes that MSCI
Barra uses as the basis of the construction of the MSCI Standard Index Series
Eligible Markets (DM)Country Name

Stock Exchange

AUSTRALIA
AUSTRIA

Australian Stock Exchange
Vienna Stock Exchange

BELGIUM
CANADA
DENMARKFINLAND

Euronext
Toronto Stock Exchange
Copenhagen Stock Exchange
Helsinki Stock Exchange

FRANCE

Euronext

GERMANY

Deutsche Börse

GREECE

Athens Exchange

HONG KONG

Stock Exchange of Hong Kong

IRELAND

Irish Stock Exchange

ITALY

Borsa Italiana

JAPANTokyo Stock Exchange

Osaka Stock Exchange

JASDAQ
Nagoya Stock Exchange

NETHERLANDSNEW ZEALANDNORWAYEuronext
New Zealand Stock Exchange
New Zealand Alternative Exchange
Oslo Stock Exchange

PORTUGALSINGAPORE

Euronext
Singapore Exchange

SPAIN
SWEDEN

Madrid Stock Exchange
Stockholm Stock Exchange

SWITZERLAND

Nordic Growth Market
Nya Marknaden
AktieTorget
Swiss Exchange

UNITED KINGDOM

London Stock Exchange

USA

New York Stock Exchange
NASDAQ
American Stock Exchange

Market Segment

Prime Market
Standard Market
Eurolist

Main List
I ListNM ListEurolist
Alternext
Official Market
Regulated Market
Big Capitalization
Medium and Small Capitalization
Main Board
Growth Enterprise Market
Official Market
Irish Enterprise Exchange (IEX)
Blue Chip
STAR
Standard
Mercato ExpandiFirst Section
Second Section
Mothers
First Section
Second Section
HerculesFirst Section
Second Section
CentrexEurolist

Main List
SMB List
Primary Capital Certificates List
Eurolist
Main BoardSESDAQ
Primer Mercado
A-listO-list

VIRT-XSWX
SWX Local Caps
Main Market
AIM

1 For a more detailed description of the MSCI universe, please refer to Appendix II

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Standard Index Series Methodology|November 2007
Eligible Markets (EM)Country Name

Stock Exchange

ARGENTINA
BRAZIL

Buenos Aires Stock Exchange
Bolsa de Valores de Sao PauloCHILECHINA (1)Santiago Stock Exchange
Shenzen Stock Exchange
Shanghai Stock Exchange
Stock Exchange of Hong Kong

COLOMBIACZECH REPUBLIC

Colombian Stock Exchange
Prague Stock Exchange

EGYPT
HUNGARY

Cairo & Alexandria Stock Exchanges
Budapest Stock Exchange

INDIA
INDONESIA

National Stock Exchange
Mumbai Stock Exchange
Jakarta Stock Exchange

ISRAEL (1)JORDANKOREA

Tel Aviv Stock Exchange
Amman Stock Exchange
Korea Exchange

MALAYSIA

Malaysia Stock Exchange

MEXICO
MOROCCOPAKISTANPERUPHILIPPINESPOLAND

Mexican Stock Exchange
Casablanca Stock Exchange
Karachi Stock Exchange
Lima Stock Exchange
Philippine Stock Exchange
Warsaw Stock Exchange

RUSSIA (1)Russian Trading System (RTS)MICEX Stock Exchange
Johannesburg Stock Exchange

SOUTH AFRICATAIWANTHAILAND
TURKEY

Taiwan Stock Exchange
GreTai Securities Market
Stock Exchange of Thailand
Market for Alternative Investment
Istanbul Stock Exchange

Market Segment

Level 1
Level 2
Novo Mercado

Main Board
Growth Enterprise Market
Main Market
Secondary Market
Free Market
Equities Category A
Equities Category B

Main Board
Development Board
First Market
KSE
KOSDAQ
Main Board
Second BoardMESDAQ

Main Board
Main Market
Parallel Market

Main Board
AltX

National Market
Second National Market
New Economy Market

1 For a more detailed description of the MSCI universe, please refer to Appendix II

Eligible Markets (Standalone Markets)
Country Name

Stock Exchange

BAHRAINKUWAITOMAN
QATARUNITED ARAB EMIRATESBahrain Stock Exchange
Kuwait Stock Exchange
Oman Securities Market
Doha Securities Market
Abu Dhabi Stock Exchange
Dubai Stock Exchange
Dubai International Financial Exchange
TadawulColombo Stock Exchange
Main Board
Second Board

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Standard Index Series Methodology|November 2007
Eligible Classes of securities (DM)Country NameClasses of Securities

AUSTRALIA

Ordinary shares
Preferred shares (2)Ordinary shares
Preferred shares (2)Participation certificates
Ordinary shares
Preferred shares (2)Ordinary shares
Units of Income Trusts"A" shares"B" shares"A" shares"B" shares"K" shares
Ordinary shares
Preferred shares (2)Certificats d'Investissement
Certificats Coopératif d'Investissement
Ordinary shares
Preferred shares (2)Ordinary shares
Preferred shares (2)"A" shares"B" shares
Ordinary shares
Units
Ordinary shares
Preferred shares (2)Savings shares
Ordinary shares
Ordinary shares
Preferred shares (2)Certificates
Ordinary shares
Preferred shares (2)"A" shares"B" shares
Primary Capital Certificates
Ordinary shares
Ordinary shares
Ordinary shares
Preferred shares (2)"A" shares"B" shares"C" shares
Swedish Depositary Receipts
Registered shares
Bearer shares
Participation certificates
Dividend-right certificates
Ordinary shares
Units
Common shares
Tracking Stock

AUSTRIABELGIUM
CANADA
DENMARKFINLANDFRANCEGERMANYGREECEHONG KONG
IRELAND
ITALY

JAPAN
NETHERLANDSNEW ZEALANDNORWAYPORTUGALSINGAPORE
SPAIN
SWEDENSWITZERLAND

UNITED KINGDOM
USA

1 For a more detailed description of the MSCI universe, please refer to Appendix II
2 Preferred shares that exhibit characteristics of equity securities are generally eligible

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Standard Index Series Methodology|November 2007
Eligible Classes of securities (EM)Country NameClasses of Securities

ARGENTINA

Ordinary shares
Preferred shares (2)Ordinary shares
Preferred shares (2)UnitsCommon shares
Preferred shares (2)"B" shares"H" shares"N" shares
Ordinary shares
Preferred shares (2)Common shares
Ordinary shares
Common shares
Ordinary shares
Ordinary shares
Common shares
Preferred shares (2)ADR
Ordinary shares
Common shares
Preferred shares (2)Common shares
Ordinary shares
Certificates of Participation
Units
Ordinary shares
Ordinary shares
Common shares
Preferred shares (2)Investment shares
Common shares
Philippine Depositary Receipts
Common shares
Common shares
Preferred shares (2)
ADRs
GDRs
Common shares
Preferred shares (2)Ordinary shares
Preferred shares (2)Common shares
Preferred shares (2)Common shares

BRAZILCHILE
CHINA (1)COLOMBIACZECH REPUBLICEGYPTHUNGARY
INDIA
INDONESIAISRAEL (1)JORDANKOREA
MALAYSIAMEXICO

MOROCCOPAKISTANPERUPHILIPPINESPOLANDRUSSIA (1)

SOUTH AFRICATAIWANTHAILAND
TURKEY

1 For a more detailed description of the MSCI universe, please refer to Appendix II
2 Preferred shares that exhibit characteristics of equity securities are generally eligible

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Standard Index Series Methodology|November 2007
Eligible Classes of securities (Standalone Markets)
Country NameClasses of Securities

BAHRAINKUWAITOMAN
QATARSAUDI ARABIAUNITED ARAB EMIRATESSRI LANKA

Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares

REITs
Companies that have adopted the following REITs or REIT equivalent structures in the following countries
will qualify to be classified in the GICS Industry - Real Estate Investment Trusts (REITs):
 Australia: LPT (Australian Listed Property Trust) Belgium: SICAFI (Société d’Investissement à Capital Fixe Immobilière)
 Canada, Hong Kong, Korea, Taiwan and the U.S.: REIT (Real Estate Investment Trust) France: SIIC (Sociétés d’Investissements Immobiliers Cotées) Greece: REIC (Real Estate Investment Company)
 Japan: J-REIT (Japanese Real Estate Investment Trust) Malaysia: REIT (Real Estate Investment Trust/Property Trust Funds)
 Netherlands: FBI (Fiscal investment institution/Fiscale Beleggingsinstelling) New Zealand: Property Trusts
 Singapore: S-REIT (Singapore Real Estate Investment Trust) South Africa: Property Trust Turkey: Gayrimenkul Yatirim Ortakligi
 United Kingdom: UK-REIT United States: REITMSCI Barra closely monitors the potential emergence of REIT equivalent structures in other countries andannounces when appropriate their consideration as REITs in the Global Industry Classification Standard(GICS).
Canadian Income Trusts
Income Trusts in Canada formed under the laws of provinces which have passed limited liability legislation
and are not designed to invest in a diversified portfolio of Income Trusts, securities, and/or funds, will be
included in the MSCI Canada Equity Universe and will be subject to the same index eligibility rules applicableto other equity (and equity-like) securities.

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Standard Index Series Methodology|November 2007
The following section has been modified since May 2007:
Appendix VI: Gulf Cooperation Council Countries
Appendix X: Equity Universe

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