Consultation onImplementation Details of aSwitch to a Light Rebalancing
under Conditions of Market
StressMarch 2021
© 2021 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Background• On January 28, 2021, MSCI announced that it will implement the ability to switch a SemiAnnual Index Review (SAIR) to a “light” rebalancing scenario* under conditions of marketstress• While a majority of market participants supported the proposal, many highlighted theimportance of transparent and well-defined guidelines for triggering such a scenario, alongwith a clear communication policy• Following this feedback, MSCI opens a follow up consultation with proposals around thetimeline and criteria for the evaluation of market stress and related public communication• MSCI welcomes feedback from the investment community until April 2, 2021 and willcommunicate the results of this consultation by April 16, 2021. Should the proposals beadopted, they will be effective as part of the May 2021 Semi-Annual Index Review• Clients may provide feedback through an online survey available on:
http://www.msci.com/index-consultations-light-rebalance*Refer to Appendix for definition of “light” rebalancing (slide 9). In the context of the ongoing Consultation on Introducing Comprehensive Quarterly Index Reviews, “light” rebalancing would be potentiallyapplicable to any index review of MSCI Global Investable Market Indexes and not only SAIRs, conducted in May and November2Summary of the Proposal• In order to provide transparent and well-defined guidelines for considering a switch to a “light”
rebalancing, MSCI proposes to:
1. Set the “market monitoring period” to the last 10 business days of the month preceding theannouncement of an index review
2. Evaluate a potential switch to a “light” rebalancing only when specific criteria set forth in theMSCI Market Monitoring Framework are met during the “market monitoring period”
3. Set the “communication date” on the decision whether to switch to a “light” rebalancing to thefirst business day following the market monitoring period if the relevant criteria are met
Market Monitoring Period

Price Cutoff
Date: Last 10Business Days
May SAIRApril

Nov SAIROctober

MSCI evaluatesswitch to a“light”
rebalancing if
criteria set forthin Market
Monitoring
Framework aremetCommunication
Date (1stbusiness day)

Pre-Ann
Date (1wkbeforeAnn)

Ann Date(MidMonth)

Implementation Date(T-1)

EffectiveDate (T)MayJuneNovember

December3

Triggers for Evaluation of a Switch to a “Light” Rebalancing• MSCI would consider switching to a “light” rebalancing if either of the below criteria from the MSCI Market
Monitoring Framework are met:(A) Market Liquidity: breach of thefollowing criteria for at least 3 days withinthe “market monitoring period”(1) ACWI volatility
breaching 0.55 (approx.
99th percentile ofhistorical observations
since 2002)

AND(2) ACWI bid-ask spreadbreaching 0.19%(approx. 99th percentileof historicalobservations since2015)

OR(B) Market Functioning: 20% of theweight of constituents of the MSCI ACWI
Index not trading due to full day stock
exchange closures, cumulatively withinthe “market monitoring period”• MSCI would proceed with the scheduled Semi-Annual Index Review (SAIR) in absence of the above triggers• If the above criteria are met, a decision on whether switching to a “light” rebalancing is warranted would betaken by the relevant MSCI Index Committees, considering the individual circumstances of the market andtrading environment
Definition of key terms under the MSCI Market Monitoring Framework are available in the Appendix (slide 10)4Proposed Communication Policy• If the criteria for the evaluation of a switch to a “light” rebalancing are met, MSCI would
send a communication on its decision to switch to a “light” rebalancing or not, on or before
the first business day after the “market monitoring period”– There would be no change to the decision to switch or not to switch to a “light” rebalancing
following the “communication date”• No communication would be sent if the thresholds for the evaluation of a switch to a “light”
rebalancing are not breached during the “market monitoring period”– MSCI would no longer consider a potential switch to a “light” rebalancing after the “marketmonitoring period” and would proceed with the scheduled SAIR

• Over time, MSCI may review the thresholds used in the MSCI Market MonitoringFramework. Any resulting changes would be made public in the relevant index methodology
documentation well in advance of the “market monitoring period”

5Illustration: May 2020 SAIR
1.2

Market Monitoring Period
May 2020 SAIRACWI Index Level (right axis)

700

1650

0.8

600

0.6

Threshold for ACWI Vol

0.4

550

500

Threshold for ACWI Bid/Ask

ACWI Volatility(SD of 10-day daily returns)

0.2

450

ACWI Bid-Ask (%)

01/6/2020 1/13/2020 1/20/2020 1/27/2020 2/3/2020 2/10/2020 2/17/2020 2/24/2020 3/2/2020 3/9/2020 3/16/2020 3/23/2020 3/30/2020 4/6/2020 4/13/2020 4/20/2020 4/27/2020 5/4/2020 5/11/2020 5/18/2020 5/25/2020

400• Under the proposal, MSCI would have implemented the scheduled May 2020 SAIR as none of the criteria were met during the “marketmonitoring period”. The thresholds were breached earlier, during March 20206

Discussion Points• Do you agree with the proposed length and timeframe of the defined “market monitoringperiod”?

• Does the proposed “communication date” provide sufficient lead time prior to the index
review implementation?
• Are the proposed Market Liquidity measures and thresholds appropriate?
• Is it relevant to consider full day market closures under Market Functioning as one of thecriteria for evaluating the switch to a “light” rebalancing? Is the proposed thresholdappropriate?
• Should partial closures (e.g. caused by circuit breakers) be considered as well?

7Appendix

Light Rebalancing for Various Methodologies (Reminder)• A ‘light’ rebalancing generally focuses on replacing a scheduled SAIR with a QIR (if such QIR is defined bya methodology)• If the upcoming scheduled rebalance is already a QIR, then no change to the process would occur• For methodologies which rebalance annually or where QIRs are not defined, MSCI would proceed as per
the normal rebalancing schedule
Rebalancing schedules for various methodologies‘Normal’ Rebalancing Schedule

Rebalancing
schedule duringmarket stressIndex Methodology Example

Semi Annual + QIR

QIRMSCI Global Investable Market Indexes;
MSCI ESG Universal Indexes

Annual only

AnnualMSCI GDP Weighted Indexes

Annual + QIRAnnualMSCI Top 50 Dividend Indexes

Semi-Annual only

Semi-Annual

MSCI Minimum Volatility Indexes

QIR only

QIR

MSCI Equal Weighted Indexes

MonthlyMonthly

MSCI Hedged Indexes

9MSCI Market Monitoring Framework• The MSCI Market Monitoring Framework consists of the following three pillars:– Market Liquidity:• MSCI ACWI Index Level Bid-Ask spread: as an explicit measure of market liquidity– Based on the daily MSCI ACWI Index-weighted average bid-ask spread*• MSCI ACWI Index volatility: as an implicit measure of a potential market impact– Based on the standard deviation of the rolling 10-day daily returns of the MSCI ACWI Index– Market Functioning:• Cumulative weight of constituents of the MSCI ACWI Index that are listed on the stock exchanges
which are closed for at least one full day due to reasons other than regular market holidays– Data Availability:• Qualitative measure based on the availability of price data inputs for the purpose of the index
review*Bid Ask Spread: Calculated as ((ask-bid) / ask)

10

Historical Bid-Ask Spread
0.6

800

750
0.5
700
0.4
650

ACWI Index Level (right axis)
0.3600550Threshold for ACWI Bid/Ask0.2500ACWI Bid-Ask (%)

0.1

450012/31/2014

40012/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

12/31/2020• Threshold of 0.19% set based on approximately the 99th percentile of daily ACWI weighted bid-ask
spread since 2015
*Bid Ask Spread: Calculated as ((ask-bid) / bid)

11

Historical ACWI Volatility
1.2

900

800
1700

0.8

600

ACWI Index Level (right axis)
500
0.6

Threshold for ACWI Vol
400

0.4300ACWI Volatility(SD of 10-day ACWI daily returns)

200

0.2
100

01/1/2002

1/1/2003

1/1/2004

1/1/20051/1/2006

1/1/2007

1/1/2008

1/1/2009

1/1/2010

1/1/2011

1/1/2012

1/1/2013

1/1/2014

1/1/2015

1/1/2016

1/1/2017

1/1/2018

1/1/2019

1/1/2020

0
1/1/2021• Threshold of 0.55 set based on approximately the 99th percentile of daily ACWI weighted bid-ask
spread since 2002
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