Consultation on Proposed Changes
t thtothe Security
Sit Eli
Eligibility
ibilit RRulesl fforthe MSCI Brazil Index
May 2012©2012. All rights reserved.

msci.com
msci.com

Background and Proposal
 BM&FBOVESPA (“BVMF”) has recently sent a letter informing MSCI that it
may require the termination of the supply of real time stock market
information to MSCI unless MSCI agrees to BVMF’s
BVMF s new market data terms
by June 14, 2012
 Although the current issues with BVMF do not affect MSCI’s right to use
BVMF end of day prices,
prices MSCI believes that to ensure a reliable supply of
price data it is prudent to make an exception to the security eligibility rulesin the MSCI Global Investable Market Indices (GIMI) Methodology and is
proposing to replace local BVMF listing of constituent companies in MSCI
Brazil by the corresponding liquid ADR listing on NYSE if available
 MSCI regularly receives requests from international investors to change its
current methodology and replace local listings of Brazilian securities with
their respective NYSE listed ADRs
 This consultation may or may not lead to any changes to the MSCI GIMIMethodology©2012. All rights reserved.

msci.com2

Security Eligibility Rules
 As a general policy MSCI gives preference to local listings over foreign
listings for index inclusion for the following reasons: Full breadth and depth of the investment opportunity set captured by local listings
 Risks associated to foreign listings (e.g., counter party risk)
g listings
g and local listingsg Potential time zone differences between the foreign Potential existence of premiums / discounts of foreign listings vs. local listings (e.g., dueto fungibility concerns)
 Difference in currency exposure in portfolios©2012. All rights reserved.

msci.com3

Potential Consequences of Using ADRs over Local Listings
 Based on feedback received from the investment community by MSCI inpast consultations, ADRs might provide an easier way to get exposure toemerging markets compared to the local listings for the following reasons: ADRs potentially facilitate the investment process for institutional investors
 Trading fees might be cheaper for certain type of investors, no foreign exchange
conversions are neededd d (f(for US bbasedd investors))
 ADRs can allow better management of potential local market accessibility restrictions(e.g., capital controls, overall transaction costs, reducing custodian charges, potential
l l taxation)
localt ti )
 Free availability and dissemination of ADR prices reducing the impact of monopolistic
behavior of local exchanges
 Whenever full 2‐way fungibility exists (e.g., in Brazil), there are usually no persistentpremiums and discounts on the ADR compared to the local listing On the other hand, there are some risks associated to holding ADRs vs. local listings((e.g.,counter party risk,i k loss
loff voting/economici /i rights)
i h )©2012. All rights reserved.

msci.com4

Potential Impact on Index Composition

26 MSCI Brazill Index
d constituents out off 79 would
ld beb replacedl db
by ADRs, representing 67% off theh current index
d marketk capitalization
lThis would represent a one‐way index turnover of

67% if treated as deletions of local listings and additions of ADR counterparts

0.16% if treated as a conversion of local listings into ADRs

Other index characteristics, such as sector representation and index market capitalization would remain very similar
MSCI Brazil index composition and liquid ADR availabilityIndex
W eight

Liquid ADR
available

PETROBRAS PN
VALE PNA

9.0%

Yes

ELETROBRAS PNB

0.5%

No

8.4%

Yes

COPEL PNB

0.5%

Yes
No

Security Name

Summary Index Characteristics# of constituents# of local listings

79

Simulated
MSCI Brazil797953# of ADRs

026

MSCI Brazil

Index Market Cap (USD billion)

476

Weight of deletions

66.8%

477

Security Name

Index
W eight

Liquid ADR
available

ITAU UNIBANCO PN

7.0%

Yes

USIMINAS PNA

0.5%

PETROBRAS ON

6.6%

Yes

TRACTEBEL ENERGIA ON

0.5%

No

AMBEV PN

6.3%

Yes

ELETROBRAS ON

0.5%

Yes

BANCO BRADESCO PN

6.1%

Yes

CYRELA BRAZIL REALTY

0.5%

No

VALE ON

5.6%

Yes

TOTVS

0.4%

No
No

ITAUSA PN

2.4%

No

COSAN ON

0.4%

BRASIL FOODS ON

2.4%

Yes

KLABIN PN

0.4%

No

BM&F BOVESPA2.1%

No

RAIADROGASIL

0.4%

No

OGX PETROLEO

1.9%

No

ALL AMER LAT ON

0.4%

No

CIELO

1.9%

No

FIBRIA CELULOSE ON

0.4%

Yes

CEMIG PN

1.9%

Yes

TAM PN

Weight of additions

0.4%

Yes

66.8%

TELEF BRASIL PN

1.7%

Yes

HYPERMARCAS

0.4%

No

One-Way index turnover*

0.16%

GERDAU PN

1.5%

Yes

LOCALIZA RENT A CAR

0.4%

No

CCR

1 5%
1.5%

No

MRV ENGENHARIA

0 4%
0.4%

No

ULTRAPAR PART ON

1.5%

No

ANHANGUERA EDU ON

0.4%

NoNo

* assuming a conversion of local listings into ADRs

Sector Distribution
Sector

Weight in
MSCI Brazil

Weight in simulated
MSCI Brazil

BANCO BRASIL

1.4%

No

BANRISUL PNB

0.3%

BC SANTANDER BRASIL UNIT

1.4%

Yes

EDP ENERGIAS DO BRASIL

0.3%

No

CSN SIDERURGICA NAC'L ON

1.2%

Yes

DIAGNOSTICOS AMERICA ON

0.3%

No

REDECARD

1.2%

No

MULTIPLAN EMPREENDIM ON

0.3%

No

SOUZA CRUZ ON

1.1%

No

ODONTOPREV ON

0.3%

No

BR MALLS PARTICIPACOES

1.0%

No

USIMINAS ON

0.3%

No

Consumer DiscretionaryCConsumer
St
Staples
l

4.0%

4.0%

PAO DE ACUCAR PN

1.0%

Yes

AES TIETE PN

0.3%

No

TIM PART. ON

1.0%

Yes

OI ON

0.3%

Yes

13 4%
13.4%

13 4%
13.4%

EMBRAER

0.9%

Yes

ECORODOVIAS INFRA E LOG

0.3%

No

Energy

19.3%

19.3%

SABESP ON

0.9%

Yes

DURATEX (NEW )

0.3%

No

OI PN

0.9%

Yes

ELETROPAULO METROPOL.PN

0.3%

No

Financials

23.0%

23.0%

BRADESPAR PN

0.8%

No

AMIL PARTICIPACOES

0.3%

No

Health Care

0.9%

0.9%

LOJAS RENNER

0.8%

No

HRT PARTICIP EM PETROLEO

0.2%

No

Industrials

NATURA COSMETICOS ON

4.0%0.8%

No

PORTO SEGURO

4.0%

0.2%

No

GERDAU METALURGICA PN

0.6%

No

CTEEP PN

0.2%

No

Information Technology

3.5%

3.5%

CESP PNB

0.6%

No

MMX MINERACAO METALICOS

0.2%

No

Materials

20.7%

20.6%

CIA HERING

0.6%

No

BRASKEM PNA

0.2%

Yes

CETIP ON

0.6%

No

LIGHT

0.2%

No

Telecommunication Services

3.9%

3.9%

LOJAS AMERICANAS PN

0.6%

No

SUL AMERICA UNITS

0.2%

No

Utilities

7.3%

7.3%

JBS

0.6%

No

ROSSI RESIDENCIAL

0.1%

No

PDG REALTY

0.6%

No

SUZANO PAPEL E CELUL PNA

0.1%

No

CPFL ENERGIA ON

0.5%

Yes

BROOKFIELD INCORPORACOES

0.1%

No

GOL PN

0.1%

Yes

Data as of May 11, 2012©2012. All rights reserved.

msci.com5

Potential Impact on Security Liquidity Weights
 Liquidity is high for the ADRs
although lower than for locallistings
 The median Annualized Traded
Value Ratio (ATVR) is 50% for ADR
listings compared to 104% for
local listings Weight differences between
local listings and ADRs are
small indicating no significant
ADR premium/discounts
 The maximum weight difference is5 basis points

Security Name

Local listing ADR listing Local listing ADR listing
12M ATVR 12M ATVR
weightweightW eight
Difference

PETROBRAS PN
VALE PNA

117%

24%

9.0%

9.0%

0.05%

195%

32%

8.4%

8.4%

-0.05%ITAU UNIBANCO PN

90%

52%

7 0%
7.0%

7 0%
7.0%

0 00%
0.00%

PETROBRAS ON

44%

67%

6.6%

6.7%

0.04%

AMBEV PN

45%

22%

6.3%

6.3%

-0.01%BANCO BRADESCO PN

75%

32%

6.1%

6.1%

0.01%

VALE ON

75%

86%

5.6%

5.6%

-0.03%BRASIL FOODS ON

81%

21%

2.4%

2.4%

0.01%

CEMIG PN

89%

58%

1 9%
1.9%

1 9%
1.9%

0 00%
0.00%

TELEF BRASIL PN

72%

32%

1.7%

1.7%

-0.01%GERDAU PN

212%

83%

1.5%

1.5%

0.00%

BC SANTANDER BRASIL UNIT

97%

69%

1.4%

1.4%

-0.01%CSN SIDERURGICA NAC'L ON

120%

57%

1.2%

1.2%

0.00%

PAO DE ACUCAR PN

128%

48%

1.0%

1.0%

0.01%

TIM PART. ON

110%

94%

1.0%

1.0%

0.01%

EMBRAER

66%

64%

0.9%

0.9%

0.00%

SABESP ON

54%

45%

0.9%

0.9%

0.01%

OI PN

194%26%

0.9%

0.9%

0.00%

CPFL ENERGIA ON

74%

46%

0.5%

0.5%

0.00%

COPEL PNB

142%

47%

0.5%

0.5%0.00%

ELETROBRAS ON

83%

32%

0.5%

0.5%0.00%

FIBRIA CELULOSE ON

191%

62%

0.4%

0.4%

0.00%

TAM PN

143%

73%

0.4%

0.4%0.01%

OI ON

152%

15%

0.3%

0.3%

0.00%

BRASKEM PNA

221%

55%

0.2%

0.2%

0.00%

GOL PN

60%
460%

143%
3%

0.1%
0%

0.1%
0%

0.00%
000%
Median104%
50%
Note: ATVR data as of April 30, 2012; weights in the MSCI Brazil and the simulated MSCI Brazil indicesas of May 11, 2012©2012. All rights reserved.

msci.com

6

MSCI Brazil and simulated MSCI Brazil: Historical Performance
Comparison
 Over the November 2007 – March 2012 period, the two indices have
had an almost identical performance and risk
 Returns correlation was 99
99.6%
6% over this period
 This correlation is understated due to a timing difference between the MSCI Brazil
index levels, calculated using the 4PM London time WM/Reuters exchange rates andthe closing prices of ADRs in the simulated Brazil Index (9PM London time) that
implicitly incorporate the BRL exchange rate changes from 4PM to 9PM
Index Performance Chart (USD)
1400
MSCI Brazil

Simulated MSCI Brazil

1200

MSCI Brazil

Simulated
MSCI Brazil

Annualized Return (%)*

-0.32%-0.31%

Annualized Risk (%)

37 2%
37.2%

37 4%
37.4%

600

Correlation

99.6%

400

Historical Beta

1.00

Statistics from 30/11/2007 to30/03/2012

1000
800

200

©2012. All rights reserved.

msci.comFeb‐‐12Nov‐‐11Aug‐‐11May‐‐11Feb‐‐11Nov‐‐10Aug‐‐10May‐‐10Feb‐‐10Nov‐‐09

Aug‐‐09

May‐‐09Feb‐‐09

Nov‐‐08

Aug‐‐08

May‐‐08

Feb‐‐08

Nov‐‐07

07

Discussion Points Would the use of ADRs be beneficial to your investment process?
 Is it in your point of view cost‐effective to replace local listings by ADRs?
 Are there advantages in market structure in the trading of ADRs?
 Lower transaction costs?
p exchanges
g for tradingg ADRs vs onlyy one for local listings?
g Multiple

 Would the use of ADRs reduce the risk associated to monopolistic
behavior of local stock exchanges (e.g., restrictive terms of usage ofmarket information)?
) What would be the ideal timeline for the proposed change?
 Would an ADR‐only index be a better alternative to the proposed index?

©2012. All rights reserved.

msci.com8

AAppendix
di©2012. All rights reserved.

msci.com9

Weight of Brazil in Selected Regional Indices
ADR premiums
Brazil ADR Premiums/Discounts as of May 10, 2012
Security NamePETROBRAS PN
VALE PNA

Weight of Brazil in selected regional indices

ADR premium /discount
0.7%
-0.5%

ITAU UNIBANCO PN

0.1%

PETROBRAS ON

0.8%

AMBEV PN

0.0%

BANCO BRADESCO PN

0.3%

VALE ON

-0.3%
0 6%
0.6%

MSCI Index

W eight of Brazil

MSCI EM Latin America
MSCI BRIC

63.7%

BRASIL FOODS ON

32.4%

CEMIG PN

0.3%

MSCI EM

14.6%

TELEF BRASIL PN-0.4%

MSCI EM Small Cap

7.3%

GERDAU PN

0.1%

MSCI ACW I

1.9%

BC SANTANDER BRASIL UNIT

-0.3%

1.8%

CSN SIDERURGICA NAC'L
NAC L ON

0 5%
0.5%

PAO DE ACUCAR PN

1.8%

TIM PART. ON

1.1%

EMBRAER

0.2%

MSCISC ACWC I IMI©2012. All rights reserved.

SABESP ON

0.9%

OI PN

0 0%
0.0%

CPFL ENERGIA ON-0.1%

COPEL PNB

0.5%

ELETROBRAS ON-0.8%

FIBRIA CELULOSE ON-0.7%

TAM PN

1.9%

OI ON

-0.6%

BRASKEM PNA

1.6%

GOL PN

0.2%

msci.com

10

MSCI 24 Hour Global Client Service
Americas

Europe, Middle East & Africa

Asia PacificAAmericas
i

1 888 588 4567 (toll
1.888.588.4567( ll free)f )C
CapeTTown+27.21.673.0100
27 21 673 0100

Chi NorthChina
N th10800 852 1032 (toll10800.852.1032( ll free)f )Atlanta+1.404.551.3212

Frankfurt+49.69.133.859.00

China South

10800.152.1032 (toll free)

Boston+1.617.532.0920

Geneva+41.22.817.9777

Hong Kong+852.2844.9333

Chicago+1.312.706.4999

London+44.20.7618.2222

Seoul+798.8521.3392 (toll free)Monterrey+52.81.1253.4020

Milan+39.02.5849.0415

Singapore

800.852.3749 (toll free)Montreal+1.514.847.7506

Paris0800.91.59.17 (toll free)

Sydney+61.2.9033.9333

New York+1.212.804.3901

Tokyo+81.3.5226.8222

San Francisco+1.415.836.8800

São Paulo+55.11.3706.1360

Stamford+1.203.325.5630

Toronto+1.416.628.1007

clientservice@msci.com |www.msci.com©2012. All rights reserved.

msci.com
msci.com

11

Notice and Disclaimer
This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is the property of MSCl Inc. or its
subsidiaries (collectively, “MSCI”), or MSCI’s licensors, direct or indirect suppliers or any third party involved in making or compiling any Information (collectively, with MSCI, the“Information Providers”) and is provided for informational purposes only. The Information may not be reproduced or redisseminated in whole or in part without prior written
permission from MSCI.

The Information may not be used to create derivative works or to verify or correct other data or information. For example (but without limitation), the Information may not be used
to create indices, databases, risk models, analytics, software, or in connection with the issuing, offering, sponsoring, managing or marketing of any securities, portfolios, financial
products or other investment vehicles utilizing or based on, linked to, tracking or otherwise derived from the Information or any other MSCI data, information, products or services.

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information. NONE OF THE INFORMATION PROVIDERS MAKES ANY EXPRESS OR
IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENTPERMITTED BY APPLICABLE LAW, EACH INFORMATION PROVIDER EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
ORIGINALITY, ACCURACY, TIMELINESS, NON‐INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE
INFORMATION.

Without limiting any of the foregoing and to the maximum extent permitted by applicable law, in no event shall any Information Provider have any liability regarding any of theInformation for any direct
direct, indirect
indirect, special
special, punitive
punitive, consequential (including lost profits) or any other damages even if notified of the possibility of such damages
damages. The foregoing shallnot exclude or limit any liability that may not by applicable law be excluded or limited, including without limitation (as applicable), any liability for death or personal injury to theextent that such injury results from the negligence or wilful default of itself, its servants, agents or sub‐contractors.

Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past
performance does not guarantee future results.

None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), any security, financial product or other investment vehicle or any trading strategy.

MSCI’ss indirect wholly‐owned
MSCI
wholly owned subsidiary Institutional Shareholder Services,Services Inc
Inc. (“ISS”)( ISS ) is a Registered Investment Adviser under the Investment Advisers Act of 1940.
1940 Except withrespect to any applicable products or services from ISS (including applicable products or services from MSCI ESG Research Information, which are provided by ISS), none of MSCI’sproducts or services recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies andnone of MSCI’s products or services 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 MSCI ESG Indices use ratings and other data, analysis and information from MSCI ESG Research. MSCI ESG Research is produced by ISS or its subsidiaries. Issuers mentioned orincluded in any MSCI ESG Research materials may be a client of MSCI, ISS, or another MSCI subsidiary, or the parent of, or affiliated with, a client of MSCI, ISS, or another MSCIsubsidiary, including ISS Corporate Services, Inc., which provides tools and services to issuers. MSCI ESG Research materials, including materials utilized in any MSCI ESG Indices orother products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body.

Any use of or access to products, services or information of MSCI requires a license from MSCI. MSCI, Barra, RiskMetrics, ISS, CFRA, FEA, and other MSCI brands and product names are
the trademarks, service marks, or registered trademarks or service marks of MSCI or its subsidiaries in the United States and other jurisdictions. The Global Industry Classification
Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor’s. “Global Industry Classification Standard (GICS)” is a service mark of MSCI and Standard& Poor’s.
© 2012 MSCI Inc. All rights reserved.

©2012. All rights reserved.

RV Jan 2012

msci.com
msci.com

12