CONSULTATION ON A MARKET
RECLASSIFICATION PROPOSALFOR THE MSCI ICELAND INDEX
Potential Reclassification fromStandalone to Frontier Markets
August 2019
This consultation may or may not lead to the implementation of any or all of the proposedchanges in MSCI’s indexes. Consultation feedback will remain confidential unless aparticipant requests that its feedback be disclosed. In that case, the relevant feedback
would be published at the same time as the final results of the consultation.
© 2019 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.Reclassification Proposal• MSCI proposes to reclassify the MSCI Iceland Index from Standalone to FrontierMarkets
─ The proposed reclassification would be reflected in all relevant global andregional composite indexes─ The proposal is to implement the potential reclassification in one stepcoinciding with the May 2020 Semi‐Annual Index Review• MSCI proposes to apply the minimum size requirements for Smaller FrontierMarkets, and a minimum liquidity requirement of 15% Annualized Traded Value
Ratio (ATVR) for Average Liquidity markets• MSCI will consult with market participants on this reclassification proposal until
October 31, 2019
‒ MSCI will announce its decision in November 2019

• Please note that this proposal may or may not lead to any changes to the MSCIIndexes

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BACKGROUND•

Iceland has lifted most of the capital controls it has instituted since 2008
2017

2018

2019

• While investment in equities wasgenerally exempted, other investments
including domestic currency deposits
were subject to special reserve
requirements:- 1 year holding period- 40% Special Reserve Ratio (SRR)- 0% interest rate on capital flow accounts
with the Central Bank• New inflows of foreign
currency up to a total of ISK
100 million were no longer
affected by the SRR• The SRR was loweredfrom 20% to 0%

Foreign
Exchange
Liberalization
Level• Central Bank organized auctions to buy
offshore króna assets in exchange forcash payment in foreign currency• Central Bank continued tobuy offshore króna assets• The offshore market for
the króna no longerexists• FX restrictions remained thesame since 2017

• FX restrictions
remained the samesince 2017MSCI StandardConstituents• Not available(index launched in June 2018)• One Standard constituent• Two Standard
constituents

Capital Flow
Restrictions• Most restrictions on FX transactions
were lifted, with the exception of somesuch as:- FX transactions between residents andnon-residents without the intermediationof a financial undertaking- Derivatives trading for purposes otherthan hedging• For inflows beyond thethreshold and existingaccounts, the SRR waslowered from 40% to 20%• SRR remains notapplicable for equity
investments

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MARKET ACCESSIBILITY REVIEW 2019Market Accessibility Assessment
Openness to foreign ownership
Investor qualification requirement++

Foreign ownership limit (FOL) level++

Foreign room level++

Equal rights to foreign investors++• Capital Flow Restriction Level: Repatriation
proceeds must be linked to security
transactions and it has to be reported to thecentral bank

Ease of capital inflows / outflows
Capital flow restriction level-/?

Foreign exchange market liberalization level-/?

Efficiency of the operational framework
Market entry
Investor registration & account set up+• Foreign

Exchange Market Liberalization
Level: There is no offshore currency market
and there are some constraints on theonshore currency market

Market organization
Market regulations++

Information flow++

Market infrastructure
Clearing and settlement++

Custody++

Registry / Depository++

Trading++

Transferability++

Stock lending-/?

Short selling-/?

• Investor Registration & Account Set Up:

Registration is required, but the process isefficient• Stock Lending/ Short Selling: Allowed but is
not an established market practice

Availability of Investment Instrument
Stability of institutional framework++

4Simulated Constituents of the MSCI Iceland
Indexes (1/2)
Company

Full Mcap* FIF Mcap* FIF** Size-SegmentMarel

3,681

2,7610.75

Standard

Arion Banki

1,1307340.65

Standard

Reitir Fasteignafelag

465

442

0.95

Small Cap

Hagar

418

418

1

Small Cap

Icelandair Group Holding390

1910.49

Small Cap

Festi

338

3210.95

Small Cap

Siminn

336

319

0.95

Small Cap

Reginn

323

258

0.8

Small Cap

Eimskipafelag Islands

268

201

0.75

Small Cap

Eik Fasteignafelag

241

205

0.85

Small Cap

Vatryggingafelag Islands

201

171

0.85

Small Cap

Based on the simulated
results, 11 out of the 12
constituents of the MSCI
Iceland IMI would be
eligible using theFrontier Markets
requirementsData as of July 18, 2019
The simulation reflects the application of the Semi Annual Index Review methodology, using the Frontier Markets requirements
for Smaller FM and Average Liquidity Markets* USD million** Foreign Inclusion Factor

5Simulated Constituents of the MSCI Iceland
Indexes (2/2)
Number of Constituents
Large CapMid Cap

Standard

Small Cap

IMIStandalone Markets

1

1

2

1012Frontier Markets

112911

Data as of July 18, 2019
The simulations reflect the application of the Semi‐Annual Index Review methodology, using the (1) Standalone Markets and (2) Frontier Markets requirements for Smaller FM and Average Liquidity
Markets

Free Float Adjusted Market Capitalization (USD million)
Large CapMid Cap

StandardSmall CapIMIStandalone Markets

2,761

734

3,495

2,833

6,328

Frontier Markets

2,761

734

3,495

2,525

6,020

Data as of July 18, 2019
The simulations reflect the application of the Semi‐Annual Index Review methodology, using the (1) Standalone Markets and (2) Frontier Markets requirements for Smaller FM and Average Liquidity
Markets• The MSCI Iceland Index would continue to have two constituents under Frontier Markets
with a free float adjusted market capitalization of USD 3,495 million• The MSCI Iceland Small Cap Index would have one less constituent which would result in adecrease in the free float adjusted market capitalization by USD 308 million
6Simulated Impact on the MSCI Frontier Markets
Index (ex Kuwait)
Pro forma Standard Index
Index Market
Weight# Sec.
CapFM

74,895100.0%89

FM ex GCC
Vietnam
MoroccoNigeria
Kenya
Romania
IcelandBangladesh
LebanonMauritius
Slovenia
Croatia
Kazakhstan
JordanSri Lanka
SenegalTunisia
Estonia
Lithuania
SerbiaIvory CoastBenin
Burkina Faso

67,37018,906
10,049
6,911
6,028
5,173
3,495
2,798
2,508
2,154
1,890
1,553
1,502
1,162
777
705
692
466
249
208
144
00

90.0%
25.2%
13.4%
9.2%
8.0%
6.9%
4.7%
3.7%
3.3%
2.9%
2.5%
2.1%
2.0%
1.6%
1.0%
0.9%
0.9%
0.6%
0.3%
0.3%
0.2%
0.0%
0.0%

80
16
11
10
4
5244
2
2
32
32
12222
1
00

FM GCC
Bahrain
Oman

7,525
6,161
1,365

10.0%
8.2%
1.8%

954• The simulated MSCI Iceland Index would
have a potential weight of 4.7% in the
MSCI Frontier Markets Index

Note: All market caps are in USD millions. Data as of the close of July 18, 20197

Simulated Impact on the MSCI Frontier Markets
100 Index (ex Kuwait)
Current Index(ex AR)*KUWAIT
VIETNAM
MOROCCOKENYANIGERIA
BAHRAIN
ROMANIABANGLADESHKAZAKHSTANOMANJORDANSRI LANKA
MAURITIUS
LITHUANIATUNISIAICELAND# of constituents
1928
747561335321000103

Weight
25%
15%
11%
9%
9%
8%
8%
7%
3%2%2%1%0%0%0%0%

Simulated Index(ex KW inc IS)**# of constituents
0297475615353211111100Weight0%30%
10%9%9%8%8%8%
3%2%2%1%0%0%0%9%

MSCI FM 100 Index (ex KW inc IS)
Simulated Top 10 Constituents

Security NameCountry

Simulated
New Weight

AHLI UNITED BANK (KW)BAHRAIN

6.1%

VINGROUP JSC

VIETNAM

5.6%

SAFARICOM

KENYA

5.1%

VIETNAM DAIRY PRODUCTVIETNAM

5.0%

MAROC TELECOM

MOROCCO

3.9%

MAREL

ICELAND

3.6%

VINHOMES JSCVIETNAM

3.5%

BANCA TRANSILVANIA

ROMANIA

2.9%

ATTIJARIWAFA BANKMOROCCO2.8%

SQUARE PHARMACEUTICALSBANGLADESH

2.6%

The full list of 100 securities is available upon request through
MSCI’s Client Service*Data based on the pro forma index (post reclassification of Argentina and without application of the phasingrules) as part of the May 2019 Semi-Annual Index Review** Simulated pro forma data as of the May 2019 SAIR (calculation date May 15, 2019, as of date May 29, 2019)8Key Questions• Is the level of accessibility of the Iceland equity market for foreign
investors sufficient to warrant a reclassification of the MSCI Iceland
Index to Frontier Markets?

• Should MSCI give more time before the reclassification in order formarket participants to fully absorb the changes that have been
implemented in the market?

• Are there any remaining market accessibility concerns that should
prevent the reclassification?

• What is your experience, if any, in setting up accounts to invest in Iceland
equities?

• Should Iceland be reclassified to Frontier Markets, would it beappropriate to include Iceland in the list of eligible markets for the MSCI
Frontier Markets 100, MSCI Frontier Markets 15% Capped and the MSCI
Frontier Markets ex GCC 15% Capped Indexes?

9Appendix

10Size Profile of Iceland
Smaller FM

Larger FM
4,000
1,850
3,500
3,000

1,650
1,450

Min. size ref. (USD3,064mio)

1,250

2,500

KW

Iceland

1,500

JO

850

MA KE

HR

LK

1,050

2,000

1,000

Min. size ref. (USD 1,532mio)

BH
ROVN

SIOM

LB

650

IcelandNG

450500250

55% 60% 65% 70% 75% 80% 85% 90% 95% 100%40%50%60%70%80%90%100%• Smaller Frontier Markets size requirements are more appropriate for the MSCI Iceland
Index to have at least 2 Standard constituents

Note: Data based on July 18, 201911Liquidity Profile of Iceland against FM
Liquidity of FM Equity Universe
120.0%
Legend:Very Low Liquidity (Min 2.5% ATVR)
Low Liquidity (Min 5% ATVR)
Average Liquidity (Min 15% ATVR)

Weigthed 12M ATVR

100.0%

VN

80.0%

60.0%
Iceland
40.0%
BD
BH

KW

20.0%

JO
HR

RS

0.0%
0%

10%

20%

30%

40%

LB

LK

50%

60%

OM
KEMU
70%

ROWASI

NG
TNMA

80%

90%

KZ

EELT

100%% of Equity Universe above Threshold• Iceland’s Weighted ATVR is within range of the Average Liquidity Markets• About 95% of the Equity Universe for Iceland meets the minimum 15% ATVR

Note: Data based on April 17, 201912

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