Consultation on Potential Changes tothe MSCI Frontier Markets Indexes
Methodology

August 2022
Information Classification: GENERAL© 20222021 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Background➢ Due to its existing index construction and maintenance methodology, the MSCI Frontier Markets (FM) Index has been impacted
by the following issues in recent years:o A limited number of eligible securities and much smaller investment opportunity set caused by higher size cutoffs linked
to Developed Markets (DM)o Significantly higher country concentration, as a few heavily-weighted markets at the top of the index exist along with alonger list of smaller markets at the bottom
o Frequent changes in index composition, often driven by market reclassifications➢ With the aim to address these, MSCI is launching a consultation on potential changes to the MSCI Frontier Markets Indexes
methodology. Specifically, MSCI proposes the following:

1. Independent FM size cutoffs that are no longer linked to DM,
2. For each individual Frontier Market, a minimum of one company meeting the relevant MSCI Frontier Markets Indexrequirements, and
3. Regional consolidation of individual markets for the purpose of index construction and maintenance, where appropriate

MSCI welcomes feedback from the investment community on this topic until November 18, 2022. MSCI will announce the resultsof this consultation on or before November 30, 2022

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Proposal and Rationale➢ MSCI proposes the below three changes in treatment for the MSCI FM Indexes➢ Taken together, these could provide a consistently larger base for the index, which may help mitigate the impact of turnover
driven by market reclassifications

1

Independent size cutoffs

2

Lower minimum company count3

Regional consolidation ofindividual markets

Existing
treatment

DM-linked cutoffs

Minimum of 2 companies

FMs maintained
individually*

Proposedtreatment

FM-focused cutoffs not
linked to DM

Minimum of 1 company

FMs consolidated
regionally where applicable

Rationale

New size cutoffs would besignificantly lower, resulting in an
expansion of the FM opportunity set
and indexes

Allows the retention of markets withjust one Standard Index constituent
in FM and allows additional markets
for entry consideration

Consolidation of small, highly
integrated markets (e.g., the Baltic
States) addresses the ‘tail’ of small
markets in the index* With the exception of the West African Economic and Monetary Union (WAEMU), which is treated as a single market for the purpose of index construction/maintenance

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Analysis of Proposal
SIMULATION RESULTS

Information Classification: GENERAL

Analysis of Proposal: Key Findings
MSCI ran a 10-year backtest (May 2012 to May 2022) of the MSCI FM Index simulating the proposed changes*. Results show that the

proposals would have led to the following:➢

Significantly larger index market capitalization and number of constituents and greater coverage of the investable universe➢

Lower country concentration, with most of the larger FM country weights significantly reduced while smaller country
weights generally increased➢

Seven new markets with securities potentially meeting the proposed FM size and minimum company count requirements

Additionally, simulation results show that the proposal:➢

Did not compromise the overall liquidity of the FM Index➢

Resulted in significantly less volatile FM size cutoffs over time➢

Did not significantly impact average index turnover➢

Would result in 26% one-way index turnover if implemented in a single phase

A simulated list of MSCI Frontier Markets Index constituents reflecting the impact of the proposal is available athttps://www.msci.com/index-consultations.
* The simulation excludes the impact of actual special treatment applied to the indexes historically (e.g., for Kenya, Nigeria and Sri Lanka currently)

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Independent Size Cutoffs: Proposal in Detail➢ MSCI proposes the below changes to the size cutoffs used for Frontier Markets:
Existing Rules

Proposed Rules

UMSR (Universe Minimum Size Reference):
99% coverage of DM equity universe

FM UMSR:
99% coverage of FM equity universe*

GMSR (Global Minimum Size Reference):•
Small FM: ¼ of DM GMSR•
Large FM: ½ of DM GMSR

FM GMSR:
85% and 99% coverage* of FM investable
universe for Std and SC respectively, same
thresholds applied to all FMs

FIF Mcap requirement (for both investability
and final size-segment requirement):•
Small FM: ¼ of UMSR•
Large FM: ½ of UMSR

FM FIF Mcap requirement**:• For investability: ½ of FM UMSR for all FMs• Final size-segment requirement: ½ ofmarket size-segment cutoff for all FMs* Consistent with coverage targets currently used for calculating DM UMSR and GMSRs. For details on the existing rules for the calculation of DM UMSRs and
GMSRs, refer to slides 25 and 26 in the appendix to this document.
** Consistent with current application of FIF Mcap requirements for Developed Markets (DM) and Emerging Markets (EM).

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Independent Size Cutoffs: Impact on Size Requirements
2,500
2,000
1,500
-81%
1,000

Independent FM Size Cutoffs

Existing FM Index

Jun-22

Dec-21

Jun-21

Dec-20Jun-20Dec-19Jun-19Dec-18Jun-18Dec-17

Jun-17

Dec-16Jun-16

Dec-15Jun-15

Dec-14Jun-14

Dec-13Jun-13-Jun-12500
Dec-12Jun-22Jun-21

Dec-21

Dec-20Jun-20Dec-19Jun-19Dec-18Jun-18Dec-17

Jun-17

Jun-16

Dec-16

Dec-15Jun-15

Dec-14Jun-14Jun-13

Dec-13

Existing FM Index

Full Market Cap – USD Millions

Standard Index Size Reference (GMSR): FM Index-88%

Dec-12

450
400
350
300
250
200
150
100
50
0

Jun-12

Full Market Cap – USD Millions

Universe Minimum Size (UMSR): FM Index

Independent FM Size Cutoffs

The independent size cutoffs for the FM Equity Universe and MSCI Frontier Markets Index
are significantly lower than existing DM-linked cutoffs

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Independent Size Cutoffs: Impact on Opportunity Set
Security Count: FM Index

Total FIF Market Cap: FM Index
170,000

250

95%

200

90%

+33 %

130,00085%

150+15 ppts

110,000

+101%

100

80%

90,00075%

Existing FM Index

Independent FM Size Cutoffs

Existing FM Index

Existing FM Index

Independent FM Size Cutoffs

Target - Lower boundTarget - Upper bound➢ The size of the Frontier Markets Index has been on a long-term downtrend, and its market coveragehas been frequently below the target range➢ Independent size cutoffs result in a larger MSCI Frontier Markets Index with significantly moreconstituents and higher market coverage
Information Classification: GENERAL

Jun-22Jun-21

Dec-21

Jun-20Dec-20Jun-19Dec-19Jun-18Dec-18Jun-17

Dec-17

Jun-16

Dec-16Jun-15

Dec-15Jun-14

Dec-14Jun-13

Dec-13Jun-12Jun-22Jun-21

Independent FM Size Cutoffs

Dec-21

Jun-20Dec-20Jun-19Dec-19Jun-18Dec-18Jun-17

Dec-17

Jun-16

Dec-16Jun-15

Dec-15Jun-14

Dec-14Jun-13

Dec-13Jun-120

Dec-1270%
50,000Dec-1250

70,000Jun-12
Dec-12
Jun-13
Dec-13Jun-14
Dec-14Jun-15
Dec-15Jun-16
Dec-16Jun-17
Dec-17
Jun-18Dec-18Jun-19Dec-19Jun-20Dec-20Jun-21
Dec-21
Jun-22USD Millions

150,000

Average Market Coverage: FM Index

8Independent Size Cutoffs: Impact on Country Concentration
Country Weight Impact as of May 2022: FM Index(Markets sorted by descending size)
Simulated Weight Change vs. Existing FM Index

4%➢ Independent size cutoffs
significantly reduce country
concentration

3%
2%

1%

➢ Frontier Markets in theupper size spectrum
generally have lower weights
under the proposal, and viceversa

0%
-1%
-2%
-3%
-4%
-5%

Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

Information Classification: GENERAL

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Independent Size Cutoffs: No Adverse Impact on Index
Liquidity and Turnover
Median 12-Month ATVR: FM Index
35%30%➢ Independent size cutoffs did
not have an adverse impact
on index liquidity over the
backtest period

25%

20%
15%
10%
5%

Existing FM Index

Independent FM Size Cutoffs

Average number of Standard adds/deletes and turnover at SAIRs# Additions# Deletions

Turnover

Existing FM Index

8

9

10.6%

Independent FM Size Cutoffs

16

15

10.7%

Information Classification: GENERAL➢ While more additions anddeletions were observed, there
was no significant impact onindex turnover either

10Independent Size Cutoffs: More Stable Than Existing Size
Thresholds
UMSR - Relative Standard Deviation since May
2012*

Standard GMSR - Relative Standard Deviation
since May 2012*

35%

30%

30%

25%

25%

-13.2 ppts

-11.1 ppts

20%

20%

15%

15%

10%

10%

5%

5%
0%

0%
Existing FM Index

Independent FM Size Cutoffs

Existing FM Index

Independent FM Size Cutoffs

The simulated independent size cutoffs were less volatile than the actual DMbased thresholds over the backtest period* Relative Standard Deviation = Standard Deviation / Mean

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Regional Consolidation: Simulated MSCI Baltic Index
Simulated MSCI Baltic Index - Comparison
Current MSCI Estonia
Simulated MSCI Baltic
Index and MSCI Lithuania
Index
Index*
Total Index Mcap (USD mn)

1,915

1,477

Number of constituents

6

4

Weight in MSCI FM Index

1.46%

1.49%

➢ Under the proposal, regional
consolidation would result in a larger
MSCI Baltic Index with more constituents➢ In addition to Estonia and Lithuania, sucha regional index could include Latvian
securities in the future, should any
become eligible

Simulated MSCI Baltic Index - Constituents
Country

Security Name

Full Market Cap (USD mn) FIF Market Cap (USD mn)

Weight in MSCI FM Index

Lithuania

Ignitis Grupe **

1,508

452

0.34%

Estonia

Lhv Group **

1,320

594

0.45%

Estonia

Enefit Green

1,109

277

0.21%

Estonia

Tallink Group **

471

188

0.14%

Estonia

Tallinna Kaubamaja As

470

165

0.13%

Lithuania

Bank Of Siauliu

397

238

0.18%

* Under existing FM rules.
** Actual constituent of the MSCI Frontier Markets Index at the May 2022 SAIR.
Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

Information Classification: GENERAL

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Overall Impact: Larger, Less Concentrated Index
Total FIF Market Capitalization: FM Index(May 2022 SAIR)
160,000+33%

USD Millions

140,000

Country Concentration (HHI**): FM Index(May 2022 SAIR)

+42%

1,600

-203 pts

1,400

120,000

1,200

100,000

1,000

80,000800

60,000600

40,000400

20,000200-373 pts--

Existing FM Index

Independent Size
Cutoffs

Potential Overall
Impact*Existing FM Index

Independent Size
Cutoffs

Potential Overall
Impact*Taken together, the three proposals may expand the opportunity set/index and lower
country concentration* Potential Overall Impact simulates the effect of all three proposals on existing frontier markets, along with the addition of select non-FM markets with securities meeting
the requirements under the proposed changes (see next slide). NOTE: MSCI is not currently proposing to include new markets in FM – any future reclassifications would be
preceded by public consultation.
** HHI (Herfindahl-Hirschman Index) = Sum of squared percentage point country weights (lower is better/less concentrated).
Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

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Potential Impact on Markets not Currently Classified under FM# Potential FM Companies
MarketSimulated
Simulated FIF
Weight in
Mcap (USD mn)
FM

Current FM
Methodology

Proposed FM
Methodology

Zimbabwe*

4

9

4,879

3.42%

PanamaPalestine
Macedonia**
Jamaica
Trinidad And Tobago
Bulgaria
Total

1
0
0
0
0
0
5

2
4
2
2
1
1
21

2,946
1,431
888
855
181
131
11,311

2.07%
1.00%
0.62%
0.60%
0.13%
0.09%
7.93%

Potential Accessibility Issues

Elements of Operational Framework
And Ease of Capital Flows
Elements of Operational Framework
Elements of Operational Framework
Absence of active local custodians
Elements of Operational Framework
Elements of Market Infrastructure➢With independent size cutoffs and a lower minimum number of companies, seven new markets potentially meet FM
index entry requirements for size➢

NOTE: MSCI is not currently proposing to include new markets in FM. Any future reclassifications would be preceded bypublic consultation* Simulated results include impact of artificially elevated official FX rate for the Zimbabwe Dollar.
** Not currently covered by MSCI.
Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

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Discussion Points for the Proposal➢ Do you agree that the proposed independent size cutoffs, lower minimum company count, and regional
consolidation of individual markets are enhancements that should be implemented to address the issues
impacting the MSCI FM Index?
oWould moving away from the existing DM-based determination of size cutoffs present any issues as
far as index maintenance or usefulness?

➢ Is it appropriate to consolidate Estonia, Lithuania and potentially Latvia and maintain them as a single
MSCI Baltic Index?
oAre there any other individual FMs that should similarly be considered for potential consolidation?

➢ When should the proposed changes be implemented?
o Should implementation be done in one step? Should it instead be done in phases?

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Appendix

Information Classification: GENERAL

Other FM-Related Discussion Points➢ What are your fundamental drivers for investing in Frontier Markets?
➢ What changes to the existing FM classification, construction and maintenance methodology canpotentially be implemented to better align this product with said investment drivers?
➢ Are the existing criteria under the Market Classification Framework sufficient to accurately classify
markets as “Frontier”? Should other criteria be considered?
➢ Should any of the following be considered?
o Rebalance the entire FM Index as a single block instead of maintaining individual FMs

o Further relax the FM inclusion criteria to widen the opportunity set further and have it serve as abroader base upon which to construct investable products, i.e., derived indexes
o Develop a new FM plus select EM offering that improves on the existing MSCI Frontier Emerging
Markets Index methodology

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Frontier Markets Reclassifications+ Morocco- Bulgaria- Ukraine- Kuwait+ WAEMU- Lebanon

One-way index turnover45%- Pakistan

40%- Argentina+ Iceland

35%+ Pakistan

30%
25%

27
25
23
21

20%
15%

19

10%

17

5%
0%

15

Turnover - Existing FM Index

Turnover - Independent FM Size Cutoffs

No. of markets classified as FM- Qatar and UAE

No. of markets classified as FM

The number of Frontier Markets has declined to 21 from its peak of 26 in November 2013
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Historical Index Performance
Index Performance Since the May 2012 SAIR
400
350
300
250
200
150

100
50
0
May-12

May-13May-14May-15May-16FM (FRONTIER MARKETS)

May-17May-18May-19EM (EMERGING MARKETS)

May-20May-21

May-22WORLD

The MSCI Frontier Markets Index underperformed the MSCI World Index by 107 ppts since
May 2012
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Frontier Markets Country Weights as of the May 2022 SAIRMSCI Frontier Markets Index - Country Weights
0.0%
Vietnam
Morocco
IcelandBahrainKazakhstan
Romania
Kenya
Nigeria
Bangladesh
Slovenia
Oman
Mauritius
Croatia
JordanPakistan
Estonia
SenegalLithuania
Tunisia
Sri Lanka
Burkina Faso
Serbia

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%
32.7%

9.4%
8.6%
8.6%

The Frontier Markets
Index is highly
concentrated in a
few large markets,
while there are anumber of markets
with weights below
1%

6.6%
6.0%
5.3%
4.7%
4.5%
3.2%
2.1%
1.8%
1.2%
1.1%
1.0%
0.9%
0.6%
0.6%
0.6%
0.5%
0.1%
0.1%

Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

Information Classification: GENERAL

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Disparity in Size Profiles and Depth Across Frontier Markets

USD Millions

Median Index Market Cap: FM Index(May 2022 SAIR, Markets arranged by index weight)

Number of Constituents: FM Index(May 2022 SAIR, Markets arranged by index weight)

3000

30

2500

25

2000

20

1500

15

1000

10

500

5

0

0

The difference in index weights between the largest and smallest Frontier Markets isdriven by a disparity in size profiles and/or index depth
Data as of April 19, 2022, the price cutoff date for the May 2022 SAIR.

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Impact of Proposals on Country Weights in the MSCI FM
IndexCountry Weights (May 2022): FM Index
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

Existing FM Index

Independent Size Cutoffs

Potential Overall Impact** Potential Overall Impact simulates the effect of all three proposals on existing frontier markets, along with the addition of select non-FM markets withsecurities meeting the requirements under the proposed changes. NOTE: MSCI is not currently proposing to include new markets in FM – any future
reclassifications would be preceded by public consultation.

Information Classification: GENERAL

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Independent Size Cutoffs: Simulated Impact on the MSCI
Frontier Markets 100 Index
Existing Index# Securities

Independent FM Size Cutoffs

Index Wt

# Securities

Index Wt

VIETNAM

38

30.1%

34

29.8%

ICELAND

14

9.9%

14

10.2%

MOROCCO

8

8.6%

8

8.4%

BANGLADESH

14

8.2%

15

8.4%

BAHRAIN

2

8.0%

2

7.9%

ROMANIA

8

8.0%

8

7.8%

NIGERIA

8

7.2%

8

7.1%

KAZAKHSTAN

3

6.2%

3

6.0%

KENYA

3

5.8%

3

5.7%

JORDAN

4

2.2%

3

1.6%

OMAN

3

2.0%

3

2.0%

PAKISTAN

4

1.6%

8

2.9%

ESTONIA

2

0.8%

3

1.1%

LITHUANIA

2

0.8%

2

0.8%

SRI LANKA
TOTAL

2

0.5%

1

0.3%

115

100.0%

115

100.0

Data as of the May 2022 SAIR.

Information Classification: GENERAL

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Independent Size Cutoffs: Simulated Impact on the MSCI FM
15% Country Capped Index
Existing Index# Securities
Index Wt
VIETNAM
MOROCCOICELAND
BAHRAIN
KAZAKHSTANROMANIAKENYA
NIGERIABANGLADESHSLOVENIAOMAN
MAURITIUS
CROATIA
JORDANPAKISTANESTONIASENEGAL
LITHUANIATUNISIA
SRI LANKA
BURKINA FASOSERBIA
TOTAL

28
10
6
4
3
4
3
9
7
2
2
2
2
2
3
2
1
2
2
3
1
1
99

Independent FM Size Cutoffs# Securities
Index Wt

15.0%
11.8%
10.9%
10.8%
8.3%
7.5%
6.7%
5.9%
5.6%
4.1%
2.6%
2.3%
1.5%
1.4%
1.2%
1.1%
0.8%
0.8%
0.7%
0.6%
0.2%
0.2%
100.0%

Data as of the May 2022 SAIR.

Information Classification: GENERAL

44
12
14
6
3
8
4
11
24
5
7
2
6
5
21
6
1
2
4
2
1
1
189

15.0%
9.7%
11.9%
9.3%
6.0%
6.8%
5.7%
4.9%
8.2%
4.2%
3.3%
1.7%
2.4%
1.6%
5.1%
1.4%
0.6%
0.6%
0.9%
0.4%
0.1%
0.1%
100.0%

24

Independent Size Cutoffs: Simulated Impact on the MSCI
Frontier Emerging Markets Index
Existing Index
Market Classification
PHILIPPINESVIETNAMPERU
COLOMBIA
MOROCCOICELAND
BAHRAIN
KAZAKHSTANROMANIAKENYA
EGYPTNIGERIABANGLADESHSLOVENIAOMAN
MAURITIUS
CROATIA
JORDANPAKISTANESTONIASENEGAL
LITHUANIATUNISIA
SRI LANKA
BURKINA FASOSERBIATOTAL
Data as of the May 2022 SAIR.

EM
FM
EM
EM
FM
FM
FM
FM
FM
FM
EM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM
FM

# Securities
20
28
3
4
10
6
4
3
4
3
3
9
7
2
2
2
2
2
3
2
1
2
2
3
1
1
129

Independent FM Size Cutoffs

Index Wt
28.6%
16.8%
9.6%
7.7%
4.8%
4.4%
4.4%
3.4%
3.1%
2.7%
2.6%
2.4%
2.3%
1.7%
1.1%
0.9%
0.6%
0.6%
0.5%
0.4%
0.3%
0.3%
0.3%
0.3%
0.1%
0.1%
100.0%

Information Classification: GENERAL# Securities

Index Wt
20
44
3
4
12
14
6
3
8
4
3
11
24
5
7
2
6
5
21
6
1
2
4
2
1
1
219

24.7%
17.0%
8.3%
6.6%
4.7%
5.7%
4.5%
2.9%
3.3%
2.8%
2.3%
2.4%
4.0%
2.0%
1.6%
0.8%
1.2%
0.8%
2.5%
0.7%
0.3%
0.3%
0.4%
0.2%
0.1%
0.1%
100.0%

25

Calculating the Equity UMSR
2.2.3 Equity Universe Minimum Size Requirement

This investability screen is applied at the company level.
In order to be included in a Market Investable Equity Universe, a company must have the required
minimum full market capitalization. This minimum full market capitalization is referred to as the Equity
Universe Minimum Size Requirement. The Equity Universe Minimum Size Requirement applies tocompanies in all markets, Developed and Emerging, and is derived as follows:• First, the companies in the DM Equity Universe are sorted in descending order of full market
capitalization and the cumulative coverage of the free float-adjusted market capitalization of the DM
Equity Universe is calculated at each company. Each company’s free float-adjusted market capitalizationis represented by the aggregation of the free float-adjusted market capitalization of the securities of thatcompany in the Equity Universe.
• Second, when the cumulative free float-adjusted market capitalization coverage of 99% of the sorted
Equity Universe is achieved, the full market capitalization of the company at that point defines the Equity
Universe Minimum Size Requirement.
• The rank of this company by descending order of full market capitalization within the DM Equity Universe
is noted, and will be used in determining the Equity Universe Minimum Size Requirement at the next
rebalance.
NOTE: This is an excerpt from the existing MSCI Global Investable Market Indexes Methodology.

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Calculating the GMSR
2.3.2.1 DEFINING THE GLOBAL MINIMUM SIZE REFERENCE

The Global Minimum Size Reference for the Large Cap, Standard, and Investable Market sizesegments are derived in a similar manner to the derivation of the Equity Universe Minimum
Size as follows:• First, the companies in the DM Investable Equity Universe are sorted in descending order offull market capitalization and the cumulative free float-adjusted market capitalization
coverage of the DM Investable Equity Universe is calculated at each company.
• Then, the respective full market capitalizations of the companies that provide the following
cumulative free float-adjusted market capitalization coverage of the DM Investable Equity
Universe are chosen:− DM Large Cap Index: 70% coverage.
− DM Standard Index: 85% coverage.
− DM Investable Market Index: 99% coverage.

NOTE: This is an excerpt from the existing MSCI Global Investable Market Indexes Methodology.

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