Consultation on
Introducing Quarterly
Comprehensive Index
Reviews
GLOBAL INVESTABLE MARKET INDEXES

March 2021
© 2021 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

Background• MSCI recently consulted on ‘staggering’ the implementation of index reviews. As part of that

consultation, market participants suggested that as an alternative to "staggering", more frequent
comprehensive index reviews, which currently occur semi-annually, may be a way to mitigate index
change impact at each rebalancing• In light of this feedback, MSCI opens a consultation around the proposal to introduce Quarterly
Comprehensive Index Reviews for MSCI Global Investable Market Indexes (GIMI)• One of the key objectives of this proposal is to reduce the size of each comprehensive index review
by spreading the changes more evenly over each of the Quarterly Comprehensive Index Reviews.
Currently, MSCI GIMI are reviewed more comprehensively twice a year in May and November. The
index reviews conducted in February and August are smaller, designed to reflect only significant
changes in the indexes• This methodology change would also result in more timely representation and size-segmentation ofthe opportunity set in MSCI GIMI through more frequent updates of the MSCI Equity Universe andcomprehensive size-segment reviews• MSCI welcomes feedback from the investment community on this topic until June 11, 2021. MSCIwill announce the results of this consultation on or before June 30, 2021

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Proposal and Rationale• MSCI proposes to introduce Quarterly Comprehensive Index Reviews for MSCI GIMI. Under thisproposal, MSCI GIMI would be rebalanced quarterly in February, May, August and November on thebasis of the methodology which is currently applicable to the Semi-Annual Index Reviews*. The
rebalancing schedule for the non-market cap weighted indexes would remain the unchanged• Based on the historical simulations since the transition to the GIMI methodology in 2008 forDeveloped Markets (DM) and Emerging Markets (EM), such index review schedule would haveresulted in:‒ Smaller size of each comprehensive rebalancing: lower average turnover and number of changes at eachcomprehensive review‒ Better index representation: more timely updates of the equity universe, as well as more frequentsize/coverage size-segment adjustments• These changes would have resulted only in a marginal increase in the annualized turnover andnumber of index changes• The proposal would not have resulted in a significant impact on performance**:‒ Developed Markets: -1bp impact on the annualized performance‒ Emerging Markets: +7bps impact on the annualized performance*On January 28, 2021, MSCI announced that it will implement the ability to switch a Semi-Annual Index Review (SAIR) to a “light” rebalancing for MSCI GIMI under conditions of market stress.
MSCI is currently consulting on proposals around the timeline and criteria for the evaluation of market stress and related public communication. Under the proposal to introduce
Quarterly Comprehensive Index Reviews for MSCI GIMI, “light” rebalancing would be potentially applicable to any index review of MSCI GIMI and not only SAIRs, conducted in May and November**Performance measured for the period from June 2008 till December 20203

Analysis of the Proposal
BACK TESTING: 2008 - 2020

Analysis Framework and Key Findings• MSCI performed historical analysis of the proposal over the period from June 2008 till November

2020, using the following metrics, comparing the “Current” and “Proposed” rebalancing schedules:‒ Size of each index review: average number of additions/deletions and turnover at each index review‒ Index representation:▪ Median of the time to entry to the IMI of the newly eligible securities▪ Historical compliance with size – coverage integrity‒ Annualized index changes: average annual number of additions/deletions and turnover, number of flip-flops• The proposal would have resulted in the following benefits:‒ The number of constituent changes and turnover at each review would have been reduced by over 30%‒ The median entry time of newly eligible securities would have reduced from five months down to two months(assuming there is no three-month IPO seasoning rule)‒ More consistent size – coverage integrity would have been maintained in markets drifting from the target• The proposal would have resulted only in a marginal increase in the total annual number of index
constituent changes and the annual turnover:‒ Approximately 10% increase in the annual number of additions/deletions, resulting in only ~0.1% and ~0.2%
increase in the annual turnover for DM and EM respectively and no material impact on reverse turnover• In addition to the proposed four comprehensive index review scenario, MSCI also considered thesix and twelve index review scenarios. The results are available in the appendix

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Reduced Number of Changes at Each Index Review*• The average number of additions and deletions at each comprehensive index review since 2008
would have been reduced by over 30%*DM stands for Developed Markets and EM stands for Emerging Markets. “Standard” Size-Segment corresponds to a combination of Large and Mid Cap Size-Segments, targeting 85% of the Investable Equity Universe

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Reduced Turnover at Each Comprehensive Index Review• The average turnover at each comprehensive index review for the simulated MSCI World Index
would have been reduced from 0.8% to 0.52% and for the simulated MSCI Emerging MarketsIndex from 3.3% down to 1.9%

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Reflecting Equity Universe Changes Faster*• As the number of comprehensive index reviews increases, newly eligible securities, including
IPOs would likely be added faster*Defined as the period between the first time in universe and above the IMI country cut-off and first IMI inclusion dates. Ignores the 3m IPO seasoning rule8

Better Compliance with the Size – Coverage Integrity*• As markets are more frequently adjusted to comply with the size - coverage integrity, there may beless drift from the size - coverage target. For example:‒ More frequent size integrity adjustments would have resulted in smaller deviations outside the size range for

the MSCI USA Index‒ More frequent coverage integrity adjustments would have resulted in smaller deviations outside the coveragerange for the MSCI Hong Kong Index*US and Hong Kong were selected as illustrative markets only. Other markets in the simulated history would have also experienced size-coverage integrity benefits from the proposal.
Other examples are provided in the appendix.

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Marginal Increase in the Annual Index Review Changes• While some increase in the average annual number of additions and deletions is observed, it is not substantial

10Marginal Impact on the Annual and Reverse Turnover• Over the observed period the average annual turnover would have increased from 1.7% to 1.8% in DM and from
4.9% to 5.1% in EM• Reverse turnover, measured by the average opposite index constituent moves within one year period, would haveremained not higher than one for both DM and EM

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Discussion Points• Do you think introducing the Quarterly Comprehensive Index Review is an enhancement to theMSCI GIMI methodology?

• Do you see more frequent comprehensive index reviews as an efficient way of mitigating
index change impact at each rebalancing?

• While the magnitude of changes for the proposal at each index review would go down, thetotal annual turnover would slightly increase. Is this an issue? Should size-segment buffers beincreased to mitigate this?

• Currently, MSCI conducts comprehensive float review on the annual basis. Should thefrequency of this review be increased to match the proposed quarterly cycle?

• The proposed change would be applicable only to the GIMI methodology. Should thistreatment be extended to any of the non-market capitalization weighted indexes?

12Appendix

Simulation Details and Underlying Assumptions• The simulations were performed over the period from June 2008 till November 2021
‒ At inception, current constituents for the live indexes were used
• The “Current” scenario assumes the 2 SAIR / 2 QIR rebalancing schedule but does not correspond to the actual

rebalancing results in live indexes. The “Current” scenario was created on the basis of the same data assumptions
as the proposed and alternative scenarios• Average changes for each rebalancing in the “Current” scenario exclude QIRs to allow like-with-like comparison withother alternatives. The annualized index review metrics includes both SAIRs and QIRs

• To remove impact related to market reclassifications, EM, DM statistics assume constant country composition (i.e.
covers only countries included during the full period of observations)• China universe excludes A shares throughout the simulation period to remove the impact resulting from theinclusion of A shares• Each index review takes place as of the close of the implementation date (relevant month end)
• Three-month IPO seasoning rules was not taken into account14

Size Integrity Evolution: More Timely Adjustments

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More Frequent Index Reviews
SIX AND TWELVE INDEX REVIEW ALTERNATIVESAverage Additions and Deletions at Each Index Review• The average number of additions and deletions at each review consistently goes down as thefrequency of rebalancing increases

17Average Annual Number of Adds/Dels• Higher annual number of additions and deletions across all scenarios compared to the current rebalancing
schedule18

Historical Annual Number of Adds/Dels

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Average Turnover at Each Comprehensive Index Review• Lower average turnover at each comprehensive index review across all scenarios compared to thecurrent rebalancing schedule20

Average Annual Turnover• Higher average annual turnover at each comprehensive index review across all scenarios compared to thecurrent rebalancing schedule

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Historical Annual Turnover

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Reverse Turnover• Number of flip-flops within a year would increase substantially for index review frequencies higherthan quarterly23About MSCIMSCI is a leading provider of critical decision support tools and services for theglobal investment community. With over 50 years of expertise in research, dataand technology, we power better investment decisions by enabling clients tounderstand and analyze key drivers of risk and return and confidently build more
effective portfolios. We create industry-leading research-enhanced solutions thatclients use to gain insight into and improve transparency across the investment
process. To learn more, please visit www.msci.com.
The process for submitting a formal index complaint can be found on the index
regulation page of MSCI’s website at: https://www.msci.com/index-regulation.

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