CONSULTATION ON A MARKET
RECLASSIFICATION PROPOSALFOR THE MSCI KUWAIT INDEX
Potential Reclassification from Frontier to
Emerging Markets
March 2019
This consultation may or may not lead to the implementation of any or all of the
proposed 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.
— GENERAL —© 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 Kuwait Index from Frontier to Emerging
Markets.
─ 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 will consult with market participants on this reclassification proposal aspart of the 2019 Annual Market Classification Review
─ MSCI welcomes any feedback from the investment community on the
proposals on or before May 31, 2019.
• Please note that this proposal may or may not lead to any changes to the
MSCI Indexes— GENERAL —2

BACKGROUND•

The MSCI Kuwait Index was launched on January 23, 2006 and has been part of the
MSCI Frontier Markets Index since its inception•

Since May 2017, a number of positive market reforms were implemented. Changes
include:Implementation
date of thechanges

Previous situation

Current situation

Investor
Registration& AccountSet up• Translation of documents and forms to
Arabic was required• The account opening and the registration
process has been simplified and the
documents are now accepted in English.

May 2017

Clearing and
Settlement• There was an absence of a real Delivery
versus Payment (DvP) system as well as
failed trades mechanism• DvP settlement provision was introducedwith a buy-in board mechanism to help
prevent failed trades.

April 2018

Custody• Local brokers had unlimited access to trading
accounts and local custodians lacked control
over the securities as part of the settlement
cycle• An improved false trade mechanism wasintroduced. Thereby, limiting broker’s accessto investors’ custody accounts.

April 2018

— GENERAL —3

UPDATE• Since being added into the Review List, Kuwait continued to implement its
market reforms and these changes include:

Implementation
date of thechanges

Previous situation

Current situation

Foreign
Ownership
Limit (FOL)
Level• Foreigners are allowed to own 100%of local Kuwaiti companies, except forthe banking sector, where the limit isrestricted to 49%.

• Kuwait lifted the Foreign Ownership Limit of 49%
to 100% on the banking sector.

Transferability• In-kind transfers and off-exchangetransactions were manual.

• Testing oncommenced.

December 2018

 Any foreign shareholding interest of 5% or more ina bank would require prior approval from theCentral Bank of Kuwait

automatingthesystemhas

Go-live date is to be
confirmed.

 Settlement will be on a T+3 cycle.

— GENERAL —4

UPDATE (CONTINUED)• Since being added into the Review List, Kuwait continued to implement its
market reforms and these changes include:
Previous situation
Investor
Registration &Account Setup• Registration is mandatory and thefull process can take about two
weeks.

Current situation• Amendments were made in order to make theprocess for account opening less cumbersome.

Implementation
date of thechanges
October 2018

 The term “Global Custodian” is defined as an entity
licensed by a foreign regulatory counterpart thatapplies Financial Action Task Force (FATF)
recommendations.
 Exempting local licensed entities (e.g.
subcustodian/Kuwait Clearing Company) fromcertain documentation requirements to verify
client’s identity. This avoids duplication in requiringcertain documentations that are verified at the“Global Custodian” level.
 Regulate the process of relying on 3rd parties to
conduct client due diligence.

— GENERAL —5

SIMULATED CONSTITUENTS FOR MSCI KUWAIT IMICompany

Full Mcap*

FIF Mcap*

FIF**

Size-Segment

National Bank Of Kuwait

18,147

9,074

0.50

Standard

Kuwait Finance House

13,339

7,336

0.55

Standard

Mobile Telecom Co

6,718

3,359

0.50

Standard

Boubyan Bank

4,598

1,379

0.30

Standard

Agility

3,987

2,193

0.55

Standard

Gulf Bank

2,743

1,234

0.45

Standard

Burgan Bank

2,398

719

0.30

Standard

Mabanee Co Sakc

1,997

998

0.50

Standard

Boubyan Petrochemicals

1,641

1,231

0.75

Standard

Human Soft Holding

1,289

967

0.75

Small Cap

Warba Bank

1,108

554

0.50

Small Cap

Kuwait Projects Co Hldgs

1,056

370

0.35

Small Cap

Kuwait International Bk

981

491

0.50

Small Cap

National Ind Grp Holding

744

521

0.70

Small Cap

Integrated Holding

572

401

0.70

Small Cap

Alimtiaz Investment Co

501

325

0.65

Small Cap

Mezzan Holding

498

199

0.40

Small Cap

Based on simulated
result, 17 out of the 18
current constituents of
the MSCI Kuwait IMI
would be eligible using
the Emerging Markets
requirements.

Data as of January 22, 2019
The simulation reflects the application of the Semi Annual Index Review methodology, using the Emerging Markets requirements* In USD millions— GENERAL —** Foreign Inclusion Factor

6

SIMULATED INDEX CONSTITUENT STATISTICS
Number of Constituents
Large CapMid Cap

Standard

Small Cap

IMI

Frontier Markets

3

6

9

9

18

Emerging Markets

4

5

9

8

17

Data as of January 22, 2019
The simulations reflect the application of the Semi‐Annual Index Review methodology, using the (1) Frontier Markets and (2) Emerging Markets requirements

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

Standard

Small Cap

IMI

Frontier Markets

19,7697,756

27,525

3,987

31,512

Emerging Markets

21,1496,376

27,525

3,827

31,352

Data as of January 22, 2019
The simulations reflect the application of the Semi‐Annual Index Review methodology, using the (1) Frontier Markets and (2) Emerging Markets requirements• The MSCI Kuwait Index would have the same number of constituents under EM and FM— GENERAL —7

SIMULATED IMPACT ON THE MSCI EMERGING MARKETS INDEX(WITH ARGENTINA*, SAUDI ARABIA*, AND CHINA A**)Pro forma Standard Index
Index Market
Weight# Sec.
CapEM

5,393,840

100.0%

1,369

EM Asia
China**
Korea
TaiwanIndia
ThailandIndonesia
Malaysia
Philippines
Pakistan

3,817,291
1,712,770
680,418
557,153446,219
123,232
118,705
118,626
58,285
1,884

70.8%
31.8%
12.6%
10.3%
8.3%
2.3%
2.2%
2.2%
1.1%
0.0%

1,069
655
115
87
78
36
28
44
23
3

EM EMEASouth Africa
RussiaSaudi Arabia*
PolandQatar
United Arab Emirates
TurkeyKuwaitHungary
GreeceCzech Republic
Egypt

917,998
322,039
194,393145,008
62,39354,71136,29233,39627,525
16,50911,022
8,449
6,262

17.0%
6.0%
3.6%
2.7%
1.2%
1.0%
0.7%
0.6%
0.5%
0.3%
0.2%
0.2%
0.1%

184
49
23
30
20
10
10
18
9
3
6
3
3

EM Latin America
BrazilMexicoChile
Colombia
Peru
Argentina*

658,550
396,520
144,387
57,27821,622
21,18917,554

12.2%
7.4%
2.7%
1.1%
0.4%
0.4%
0.3%

116
52
26
17
9
3
9

Note: All market caps are in USD millions. Data as of the close of January 22, 2019

— GENERAL —• The simulated MSCI Kuwait
Index would have a potential
weight of 0.5% in the MSCIEmerging Markets Index

Current weight of MSCI Kuwait Index
in MSCI Frontier Markets Index: 23.7%*The pro forma figures are based on the MSCI Provisional Argentina Index and
MSCI Saudi Arabia Index which are rebalanced using EM requirements.
**The pro forma figures for the MSCI China Index takes into account the 3step inclusion process for China A shares

8

SIMULATED IMPACT ON THE MSCI FM 100(EX AR EX KW)
Current Index*

Simulated Index(ex AR ex KW)**# constituents

Weight# constituents

WeightKUWAIT
ARGENTINAVIETNAM
MOROCCOKENYANIGERIABANGLADESH
ROMANIA
BAHRAINOMAN
JORDANKAZAKHSTANSLOVENIASRI LANKA
MAURITIUS
LEBANONESTONIA
LITHUANIA

18
18
21
7
5
7
15
6
4
5
4
2
1
1
1
0
0
0

22%
18%
17%
7%
7%
6%
6%
5%
5%
2%
2%
1%
0%
0%
0%
0%
0%
0%

0
0
28
7
4
7
20
6
4
5
3
3
1
2
1
1
1
1

0%
0%
30%
10%
10%
10%
10%
9%
9%
3%
2%
3%
0%
2%
0%
1%
0%
0%

Total

115

100%

94

100%

MSCI FM 100 Index (ex AR ex KW)
Simulated Top 10 Constituents
Security NameCountryName

AHLI UNITED BANK (KW)BAHRAIN

VIETNAM DAIRY PRODUCTVIETNAMSAFARICOMKENYAMAROC TELECOM

MOROCCOBANCA TRANSILVANIA

ROMANIAATTIJARIWAFA BANKMOROCCOSQUARE PHARMACEUTICALSBANGLADESH

GUARANTY TRUST BANKNIGERIA

MASAN GROUP CORP

VIETNAMHOA PHAT GROUP JSC

VIETNAM

Simulated
New Weight
7.74%
6.98%
5.56%
4.60%
3.39%
3.23%
3.06%
2.99%
2.82%
2.35%

The full list of 94 securities is available upon request through
MSCI’s Client Service* Data as of the February 2019 Quarterly index Review (February 18, 2019)** Simulated pro forma data as of the February 2018 QIR using SAIR rules (calculation date February 18, 2019, as of date March 1, 2019)— GENERAL —9

KEY QUESTIONS• Is the level of accessibility of the Kuwait equity market to foreign
investors sufficient to warrant a reclassification of the MSCI Kuwait Index
to Emerging 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 Kuwaiti
equities?

— GENERAL —10

Appendix— GENERAL —11

SUMMARY OF THE CHANGES
Before June 2017Market Accessibility Review(As of end-February 2019)49% for the banking sector

No limits

Investor Registration & Account
Setup

Registration process can take up to
three weeks and documents had to
be in Arabic.

Registration process has been
simplified, required documents are
reduced and can be in English. The
process time has been reduced.

Market Regulations

Not in English and hard to locate

All regulations are now in English
and publicly available.

Settlement Cycle

T+0 for locals, T+2 for foreigners

T+3 unified cycle

DvP

Not available

Available in BIS Model 1*

Custodian Rejection (fail trade)

Not available

Available

Price limit up/down

5 ticks during the trading session

No limits

Off-exchange trade

Permitted, but limited

Permitted

Securities Borrowing and Lending

Not permitted

Permitted, but limited to market
makersShort Selling

Not permitted

Permitted, but limited to market
makersForeign Ownership Limits*BIS Model 1: Gross securities and gross funds settlement— GENERAL —Current

12

PLANNED MARKET DEVELOPMENTFirst Deliverables (Q1 2019)






Extended securities lending and borrowing (SLB) and short-selling;
Off-market trades enhancements;
Introducing an additional trading session – Trade-at-last (TAL);
Real Estate Investment Trusts (REITs) / Mutual funds;
Share swap;

Second Deliverables (Q3 2019)







Transition from BIS Model 1 to BIS Model 2*;
Introduction of a Central Counterparty (CCP) for Cash;
Introduction of ‘qualified brokers’ as preparation for clearing membership model;
Account structure / Sub-accounts identification for omnibus accounts;
Margin lending;Support for Repurchase Agreements (REPOs);* BIS Model 1: Gross securities and gross funds settlement
BIS Model 2: Gross securities and net funds settlement— GENERAL —13

MARKET ACCESSIBILITY REVIEW 2018
Market Accessibility Assessment

KW

Openness to foreign ownership
Investor qualification requirement++

Foreign ownership limit (FOL) level-/?

Foreign room level++

Equal rights to foreign investors+

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+

Market organization
Market regulations++

Information flow-/?

Market infrastructure
Clearing and settlement+

Custody+

Registry / Depository+

Trading++

Transferability-/?

Stock lending-/?

Short selling-/?

Competitive Landscape++Stability of institutional framework+

Note: ++: No Issue; +: No Major Issues, improvements possible; -/?: Improvements
needed / extent to be assessed Foreign Ownership Limits: The banking industry is
subject to a 49 percent foreign ownership limit.
These limitations affect more than twenty six percentof the Kuwaiti equity market.
 Equal Rights to Foreign Investors: The presence oflarge strategic shareholders in many Kuwaiti
companies may limit the level of transparency andgovernance in the market.
 Investor Registration & Account Setup: “-/?” to “+”:The requirements needed for registration with
Kuwait Clearing Co. have been reduced, simplified
and the documents in English are now accepted.
Registration is mandatory and the full process cantake about two weeks.
 Market Regulations: “+” to “++”: All regulations are
now in English and publicly available.
 Information Flow: Stock market information is often
not complete and is often not disclosed in a timely
manner.
— GENERAL —14

MARKET ACCESSIBILITY REVIEW 2018
Market Accessibility Assessment

KW

Openness to foreign ownership
Investor qualification requirement++

Foreign ownership limit (FOL) level-/?

Foreign room level++

Equal rights to foreign investors+

Ease of capital inflows / outflows
Capital flow restriction level++

Foreign exchange market liberalization level++

Efficiency of the operational framework Clearing and Settlement: “-/?” to “+”: In May 2017,
the settlement cycle moved to T+3 for both local andforeign investors and in April 2018, the introductionof a proper delivery versus payment (DvP) settlement
provision and proper failed trade management was
initiated. Omnibus structures are not widely usedsince there is a lack of a clear legal basis for them andoverdraft facilities remain prohibited.

Market entry
Investor registration & account set up+

Market organization
Market regulations++

Information flow-/?

Market infrastructure
Clearing and settlement+

Custody+

Registry / Depository+

Trading++

Transferability-/?

Stock lending-/?

Short selling-/?

Competitive Landscape++Stability of institutional framework+

Note: ++: No Issue; +: No Major Issues, improvements possible; -/?: Improvements
needed / extent to be assessed Custody: “-/?” to “+”: The operational efficiency of
the DVP model has been enhanced through theintroduction in April 2018 of a proper false trademechanism. This has mostly eliminated the need forsegregated custody and trading accounts which werepreviously required in order to mitigate the risk
deriving from local brokers having unlimited access to
trading accounts
 Registry / Depository: The central depository acts asa central registry.
 Transferability: In-kind transfers and off-exchangetransactions are prohibited.
— GENERAL —15

SIMULATED IMPACT ON THE MSCI FRONTIER MARKETSINDEX (EX AR EX KW)
Pro forma Standard Index
Index Market
Weight# Sec.
CapFM

68,187100.0%

93

FM ex GCC
Argentina
Vietnam
MoroccoNigeria
Kenya
Romania
Bangladesh
LebanonMauritius
Slovenia
Croatia
Kazakhstan
JordanSri Lanka
SenegalTunisia
Estonia
Lithuania
SerbiaIvory Coast
Benin
Burkina Faso

61,7570
17,590
8,964
7,415
5,517
4,115
3,278
2,743
2,283
1,956
1,832
1,433
1,207
854
731
723
516
254
226
120
0
0

90.6%
0.0%
25.8%
13.1%
10.9%
8.1%
6.0%
4.8%
4.0%
3.3%
2.9%
2.7%
2.1%
1.8%
1.3%
1.1%
1.1%
0.8%
0.4%
0.3%
0.2%
0.0%
0.0%

83
0
16
11
12
4
5
5
4
2
2
4
3
3
2
1
2
2
2
2
1
0
0

FM GCC

6,430
0
4,710
1,720

9.4%
0.0%
6.9%
2.5%

10
0
5
5

KuwaitBahrain
Oman

Note: All market caps are in USD millions. Data as of the close of January 22, 2019

— GENERAL —16

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— GENERAL —17

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— GENERAL —18