MSCI MARKET CLASSIFICATIONFRAMEWORK
Consultation on potential methodology
enhancements
May 2018
This consultation may or may not lead to the implementation of any or all of theproposed changes in MSCI’s indexes. Consultation feedback will remain confidential
unless a participant 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.

© 2018 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

SUMMARYMSCI is proposing to enhance the MSCI Market Classification
Framework to better reflect the evolving investment requirements
of international institutional investors
ObjectiveProposal

Increase the focus on the need ofinternational investors to access abroad range of investment
instruments globally

Change title and definition of the“Competitive Landscape” market
accessibility sub-criterion

Add an alternative to fully including
or excluding markets from the MSCI
Indexes following the introductionof certain levels of market
accessibility restrictions

Introduce the possibility of capping
the weight of markets in the MSCI
Indexes to address the introductionof certain market accessibility
restrictions
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CONSULTATION TIMELINEMSCI invites feedback from market participants on or before
November 30, 2018 and will announce the results of theconsultation on or before December 31, 2018MSCI would consult subsequently on an implementation proposal
were these proposed enhancements to the MSCI MarketClassification Framework to be adopted fully or partially following
this consultation

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AVAILABILITY OF INVESTMENTINSTRUMENTS
1st Proposal

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MSCI MARKET CLASSIFICATION FRAMEWORKThe current MSCI Market Classification Framework consists of thefollowing three criteria: economic development, size and liquidity andmarket accessibility
Criteria
AEmerging

Developed

No requirement

No requirement

Country GNI percapita 25% above theWorld Bank highincome threshold* for3 consecutive years

2
USD 797 mm
USD 71 mm
2.5% ATVR

3USD 1,594 mm
USD 797 mm
15% ATVR5
USD 3,187 mm
USD 1,594 mm
20% ATVRAt least someAt least partial
ModestHigh
ModestSignificant
Significant
Good and tested
HighModest

Very highVery highVery highUnrestricted
Very highEconomic Development

A.1BFrontier

Sustainability of economic development

Size and Liquidity Requirements
B.1

Number of companies meeting the following Standard Index criteria
Company size (full market cap) **Security size (float market cap) **Security liquidity

C Market Accessibility Criteria
C.1
C.2
C.3
C.4
C.5

Openness to foreign ownership
Ease of capital inflows / outflows
Efficiency of the operational framework
Competitive LandscapeStability of the institutional framework* High income threshold for 2016: GNI per capita of USD 12,476 (World Bank, Atlas method)** Minimum in use for the May 2018 Semi-Annual Index Review, updated on a semi-annual basis

Note: The economic development criterion is only used in determining the classification of Developed Markets while that distinction is not relevant
between Emerging and Frontier Markets given the very wide variety of development levels within each of these two universes

5EVOLVING NEEDS & REQUIREMENTS OF INVESTORS
Different types of market participants seem to have developed different
needs that require the use of different types of investment instruments(e.g., ETFs and exchange traded and over-the-counter derivatives),
including index-linked investment instruments
AssetOwners

Active AssetManager

Passive AssetManagerBroker
DealerAccessHedging
Overlay Strategy

AccessEquitization
Hedging
Leverage

AccessEquitization
Hedging

Hedging
Leverage
Product Creation••How critical is the use of index linked investment instruments in yourinvestment process?
What type of investment instruments do you use? How are you usingthem?
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CHANGE OF CRITERION
The current definition of the criterion may be insufficiently clear inhighlighting those elements of accessibility which MSCI believes
important to international institutional investors. Hence, the proposal torename it to highlight this more clearlyCompetitive Landscape
Availability of Investment Instruments•Do you agree that the availability of investment instruments is ofimportance to your investment process?
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NEW DEFINITION
Availability of Investment Instruments Sub-CriterionOver the years, investors have increasingly been using a variety of investment instruments, such as
exchange traded funds, futures, options, swaps and structured products, onshore and offshore, as acomplement to direct equity investment to the point that these have become an integral part oftheir investment processes. Today, the availability of such instruments has become critical tointernational investors for a number of their investment activities such as gaining exposure tomarkets, hedging of investments, equitization of cash positions or overlay strategies. Hence, it isexpected that stock exchanges, which often have legal or natural monopolies, should not impose
clauses in their provision of stock market data, such as securities’ prices, that could lead directly orindirectly to restricting the availability of investment instruments globally. These clauses typically
restrict investors’ access to derived stock exchange information, data and products, including, forexample, the provision of independently calculated indexes or the creation of investment
instruments based on such indexes. In addition, the imposition of these types of clauses can result in
global or regional investment instruments becoming in breach of local market rules, regulations orother restrictions. The existence of these types of practices will lead to a negative assessment.

•Does the proposed new definition meet your requirements andconstraints?
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ACCESSIBILITY REQUIREMENT
CriteriaAEmerging

DevelopedNo requirement

No requirement

Country GNI per
capita 25% above theWorld Bank highincome threshold* for3 consecutive years

2USD 797 mm
USD 71 mm
2.5% ATVR

3USD 1,594 mm
USD 797 mm
15% ATVR

5USD 3,187 mm
USD 1,594 mm
20% ATVRAt least someAt least partial
ModestHighModest

Significant
Significant
Good and tested
Very HighModestVery highVery highVery highUnrestricted
Very highEconomic Development

A.1

BFrontier

Sustainability of economic development

Size and Liquidity Requirements
B.1

Number of companies meeting the following Standard Index criteria
Company size (full market cap) **Security size (float market cap) **Security liquidity

C Market Accessibility Criteria
C.1
C.2
C.3
C.4
C.5

Openness to foreign ownership
Ease of capital inflows / outflows
Efficiency of the operational framework
Availability of Investment Instruments
Stability of the institutional framework* High income threshold for 2016: GNI per capita of USD 12,476 (World Bank, Atlas method)** Minimum in use for the May 2018 Semi-Annual Index Review, updated on a semi-annual basis••

Do you agree that there should be some minimum level of availability ofinvestment instruments under the Market Classification Framework?
Are there some restrictions above that minimum level that you deem notacceptable for the respective classifications, i.e., Developed, Emerging andFrontier?
9UNRESTRICTED AVAILABILITY OF INVESTMENTINSTRUMENTS ?
Developed Markets
Australia
Yes
Austria
Yes
Belgium
Yes
CanadaYes
Denmark
Yes
FinlandYes
FranceYes
Germany
Yes
Hong Kong
Yes
IrelandYes
Israel
Yes
Italy
Yes
JapanYes
Netherlands
Yes
New Zealand
Yes
NorwayYes
PortugalYes
SingaporeYes
SpainYes
SwedenYes
Switzerland
Yes
United Kingdom Yes
USAYesEmerging Markets
BrazilNo
ChileYes
China ANo
Colombia
Yes
Czech Republic Yes
Egypt
Yes
GreeceYes
HungaryYes
India
NoIndonesia
Yes
Korea
NoMalaysia
Yes
MexicoYes
Pakistan
Yes
PeruYes
Philippines
Yes
Poland
Yes
Qatar
Yes
RussiaYes
South Africa
Yes
TaiwanYes
Thailand
Yes
TurkeyNo
UAE
Yes

10EXAMPLES OF RESTRICTIONS

Examples of Restrictions on Investment Instruments
Restrictions on listed and traded derivative products offered by an offshore exchange where local
shares represent more than an exchange-specified weight
Restrictions on investment instruments (e.g., futures, options, SWAPs, ETFs) both issued offshore
and traded on a regulated exchange where local shares represent more than an exchangespecified weight•

Should restrictions on different types of investment instruments (e.g.,listed vs. OTC, ETFs vs. derivatives, single country vs. global) be treateduniformly?
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MARKET WEIGHT CAPPING
2nd Proposal

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POSSIBLE WEIGHT CAPPING
Local stakeholders can impose market accessibility restrictions thatwould not fully impair international investors from investing in thatmarket but that may nevertheless make the market less accessible /investable for international investors
In such instances, the weight of such markets could becapped in the MSCI Indexes instead of fully including orexcluding markets from the MSCI Indexes
Examples of Restrictions Reducing the Accessibility of Markets- Investor Qualification- Foreign Exchange- Availability of Investment Instruments•- Registration & Setup- Clearing & Settlement

Do you agree on the principle of capping the weight of markets in the MSCIIndexes as an alternative to full inclusion or exclusion of the market if therestrictions do not fully impair access to the market for international
investors?
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POTENTIAL PAST EXAMPLES
The below examples aim to serve as illustrations where a capping could
have been applied in the past
Examples of Restrictions
Argentina(2009)

Imposition of minimum period during which investments must remain in the country

Egypt(2013)

Foreign exchange liquidity crisis following the imposition of FX restrictions by the Egyptian Central
BankNigeria(2016)

Foreign exchange liquidity crisis following the imposition of FX restrictions by the Nigerian Central
Bank14

POTENTIAL FUTURE EXAMPLESThe below examples aim to serve as illustrations where a capping could
be applied in the future
Examples of Restrictions
BrazilRestrictions on listed and traded derivative instruments offered by an exchange outside of Brazil
based on certain indexes

Korea

Restrictions on listed and traded derivative instruments offered by an exchange outside of Korea
based on certain indexes
Restrictions on certain investment instruments that are based on certain indexes and are bothissued outside of India and traded on a regulated exchange

India
Lengthy and burdensome mandatory registration process subject to the Securities and Exchange
Board of India (SEBI) approval for international investors
TurkeyRestrictions on listed and traded derivative products based on certain indexes offered by anexchange outside of Turkey

Note: the above table does not include the China A Shares market that will be included in MSCI EM with a capping factor at 5% starting with the May 2018 Semi-AnnualIndex Review15

ABOUT MSCIFor more than 40 years, MSCI’s research-based indexes and analytics havehelped the world’s leading investors build and manage better portfolios.
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For more information, visit us at www.msci.com.

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