Market Consultation

FTSE Russell Client Consultation for
Updating Shares Outstanding andFree Float

ftserussell.com

June 2016

FTSE Russell Client Consultation for updating
Shares Outstanding and Free Float
Introduction
We have been working hard to bring together the combined insights, knowledge and client focus of the FTSE
and Russell Index businesses. We are committed to protecting and enhancing the strengths of bothbusinesses, and recognize that high client engagement, market consultation and consensus building play animportant role in this process. As part of our commitment to strive to develop the best possible index
solutions for our clients, we have been reviewing the methodologies of our global indexes with a view to theirconverging on best practice. A number of methodology and index policy changes have already been enacted
as part of this process, most notably in the area of corporate action treatment.
As part of the methodology review, we would now like to review the process for updating shares outstanding
and free float.

Responding to the Consultation
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/9RYYY3V
The consultation will close on July 29, 2016. All responses will be treated as confidential. FTSE Russell
may publish a summary of the consultation results, but no individual responses will be published and norespondents will be named. If you have any questions about this survey, or if you encounter any technicalissues, please contact rpawson@FTSERussell.com.

Current Process
FTSE
FTSE’s current process is to update shares quarterly subject to a 1% buffer, and intra quarter if thecumulative change exceeds 10% or USD 2bn. This latter provision was introduced in part to ensure thatindex reviews, particularly for the UK series (e.g. FTSE 100), can be conducted on up to date capitalisations.
However, it has the disadvantage that it can engender demands for liquidity in the absence of a corporate

FTSE Russell | Market Consultation – June 20162

event that would supply that liquidity. Further, there can be several such updates per week, all of which must
be processed individually by clients.
FTSE’s current process for free float is to update quarterly subject to a 3% buffer. The buffer is necessary to
prevent regular immaterial increases and decreases to the free float numbers, which consequently minimises
unnecessary turnover.

Russell
Russell’s current process is to update shares outstanding on a monthly basis subject to a 5% buffer. There
are no-intra month updates apart from those occasioned by corporate events. The methodology has theadvantage that several share changes can be processed simultaneously. However, there is a view thatmonthly updates are perhaps unnecessary.
Apart from updates in relation to corporate events, there is no process for free float updates in the Russellindexes other than the review of floats that takes place ahead of the annual reconstitution. Free floats arethen updated with no buffers applied. The delay arguably causes the indices to lose representativeness overthe course of the year, and means that corporate actions and events can be applied to outdated numbers.
We would like to solicit preliminary feedback on the desirability of the following proposed methodology to beused for both FTSE and Russell indexes:

Proposed FTSE Russell Converged Process
Quarterly Updates
On a quarterly basis, both the shares outstanding and the free float of each constituent are updated if either
the pending updates to shares outstanding equal or exceed 1% or the pending updates to free float would
cause the index free float to change by 3% or more. Both shares outstanding and free float are updated evenif, when implemented in combination, the changes act to offset each other.

Intra-Quarter Updates
If between the index quarterly updates, FTSE Russell becomes aware of a follow-on public offering of newshares, or a secondary offering of existing shares, such that either:

the investable market capitalisation change is equal to or greater than USD 1bn; or
the resultant change in index shares* is 5% or more and the associated investable market
capitalisation change is USD 250m or more.

(*) Index shares is defined as the number of shares x free float
In order to take advantage of timing to the liquidity event FTSE Russell will implement the change with twodays’ notice from the date at which they become aware of the event. If however FTSE Russell only becomesaware of the event more than two days after the subscription period has closed, implementation of theresultant changes will be deferred to the next quarterly update.
For the avoidance of doubt, events such as conversions of debt into stock, exercise of warrants, expiry oflock-ups, private placements and buy backs will not be implemented intra-quarter.
Please note: Any additional outstanding pending cumulative changes will not be implemented in conjunction
with updates resulting from public primary offerings or secondary placings. These pending changes will beimplemented at the next quarterly review (subject to breaching the quarterly parameters).

FTSE Russell | Market Consultation – June 20163

Example illustrations of proposed intra-quarter methodology:

Example 1
Primary Offering of 25m shares (no associated float change)
Company A
Shares in Index = 500m
Shares outstanding = 502m
Last closing price = GBP 10Float = 100%

Test 1500m x GBP 10 x 100% = GBP 5bn investable market capitalisation (before)
525m x GBP 10 x 100% = GBP 5.25bn investable market capitalisation (after)
GBP 5.25bn – GBP 5bn = GBP 250m (net change) (= USD 359m)
Fails investable market capitalisation of => USD1bn, therefore move to test 2
Test 2Index shares before = 500m x 100% = 500m
Index shares after = 525m x 100% = 525m
Difference = 25m/500m = 5%25m x GBP 10 = GBP 250m (USD 359m)
Change in index shares passes both the =>5% threshold and => USD250m investable market
capitalisation threshold
Result: Apply intra-quarter share update with T+2 notice

FTSE Russell | Market Consultation – June 20164

Example 2
Secondary Offering of 48m shares (float change)
Company B
Shares in Index = 800m
Shares outstanding = 790m
Last closing price = GBP 15
Existing Float = 50%
New Float = 53%
Test 1800m x GBP 15 x 50% = GBP 6bn investable market capitalisation (before)
800m x GBP 15 x 53% = GBP 6.360bn investable market capitalisation (after)
GBP 6bn – GBP 6.360bn = GBP 360m (net change) (= USD 518m)
Fails investable market capitalisation of => USD1bn, therefore move to test 2
Test 2
Index shares before = 800m x 50% = 400m
Index shares after = 800m x 53% = 424m
Difference = 24m/400m = 6%24m x GBP 15 = GBP 360m (USD 518m)
Change in index shares passes both the =>5% threshold and => USD250m investable market
capitalisation threshold
Result: Apply intra-quarter float update with T+2 notice

Example 3
Secondary Offering of 400m shares (float change)
Company C
Shares in Index = 800m
Shares outstanding = 790m
Last closing price = GBP 3
Existing Float = 50%
New Float = 100%
Test 1800m x GBP 3 x 50% = GBP 1.2bn investable market capitalisation (before)
800m x GBP 3 x 100% = GBP 2.4bn investable market capitalisation (after)
GBP 2.4bn – GBP 1.2bn = GBP 1.2bn (net change) (= USD 1.73bn)
Passes investable market capitalisation of => USD1bn and so no need to conduct test 2
Result: Apply intra-quarter float update with T+2 notice

FTSE Russell | Market Consultation – June 20165

Quarterly Updates (See supporting analysis on page 10)
1. We believe that 1% is the optimum buffer for quarterly share updates in order to ensure that themarket capitalisation of constituents are regularly brought up to date. FTSE currently adopts thismethodology and proposes to introduce this as new methodology for Russell in the absence of anystrong objection. Do you object to a 1% buffer for quarterly share updates?
NoYes (state preferred buffer)

2. We believe that 3% is the optimum buffer for quarterly free float updates in order to ensure thatfloat is regularly brought up to date whilst avoiding regular immaterial increases and decreases tothe free float numbers. FTSE currently adopts this methodology and proposes to introduce this asnew methodology for Russell in the absence of any strong objection. Do you object to a 3% buffer
for quarterly float updates?
NoYes (state preferred buffer)

3. Is quarterly the correct frequency for shares and float updates?
YesNo

If no, what is your preferred frequency?
Monthly
Semi-Annually
Other (state frequency)

FTSE Russell | Market Consultation – June 20166

Intra-Quarter Updates (See supporting analysis on pages 8-9)
4. We propose to limit intra-quarter share/float updates to two specific events which we believe
results in the natural supply of additional liquidity. Do you agree that intra-quarter updates should be
limited to follow on public offerings of new shares and secondary placings of existing shares?
Yes
NoIf no, what other liquidity events should be captured intra-quarter?

5. The intra-quarter buffers, (i.e. investable market capitalisation change =>USD 1bn; OR resultant
change in index shares => 5% and associated investable market capitalisation => USD 250m), havebeen chosen as index impact is deemed to be sufficiently significant.
Do you agree with the buffers?
Yes
No (state preferred buffer)

6. Where discovery of the public offering/secondary placing is after close of the subscription period,
do you agree that implementation should still be effective with T+2 notice as long as discovery is no
more than 2 business days after subscription close? (e.g. Subscription close is Monday 4 April anddiscovery of the event is Wednesday 6 April. Therefore implementation with T+2 notice would beMonday 11 April).
YesNo

7. If No, should we defer any late discoveries until the next quarterly updates?
Yes
Other (please specify)

FTSE Russell | Market Consultation – June 2016

7Supporting Analysis – Intra Quarter Updates
Existing Methodology
FTSE – cumulative change exceeds 10% or USD 2bn; free float change greater than 3%
The data below reflects the total number of intra-quarter shares in issue and free float changes implemented
between January 2016 and March 2016.
FTSE GEIS All Cap

JanuaryFebruary

MarchLarge

5912Mid

9176

Small

38

3554

Total

526172Russell – shares outstanding updated on a monthly basis subject to a 5% buffer; free float only
updated at annual reconstitution
The data below reflects the total number of month-end share changes implemented between January 2016
and March 2016.
JanuaryFebruary

March

RGI ex US926577R2000303194

R1000

83850Total130134221

FTSE Russell | Market Consultation – June 2016

8Proposed Methodology
Intra-quarter updates limited to follow on public offerings of new shares and secondary placings ofexisting shares where investable market capitalisation change =>USD 1bn; OR resultant change inindex shares => 5% and associated investable market capitalisation => USD 250m
The data below illustrates the number of intra-review changes which would have been implemented had theproposed methodology been in place between January 2016 and March 2016.
FTSE GEIS All Cap=>5% Index Shares & USD 250m

Of which are =>1bnLarge

116Mid126Small

181Total

4113=>5% Index Shares & USD 250m

Of which are =>1bnLarge

43Mid

63Small

160Total

266=>5% Index Shares & USD 250m

Of which are =>1bnLarge

73Mid

63Small

21Total

157=>5% Index Shares & USD 250m

Of which are =>1bnR1000

103R2000

94Total

197FTSE GEIS USAFTSE GEIS ex USRussell 3000The data below illustrates the number of intra-review changes which would have been implemented to theRussell 3000 Index had the proposed methodology been in place between January 2015 and December
2015.
Index

Jan2015

Feb2015

Mar2015

Apr2015

May2015

Jul*2015

Aug2015

Sep2015

Oct2015

Dec*2015

R1000

42861

101234R2000

6224263

024Total

104

10103

16

4258

*July figures incorporate June and July updates** December figures incorporate November and December updates

FTSE Russell | Market Consultation – June 20169Supporting Analysis – Quarterly Updates
Turnover impact of Russell US moving to quarterly shares and float updates
R3000

ShareChanges

Float
Changes

Share TurnoverFloat Turnover

Total Turnover

MV of Index

Share Turnover %Float Turnover %Total Float andShare TurnoverJune 2015

672

177

$181,332,830,860$164,052,731,403$345,385,562,263$22,776,019,856,000

0.80%

0.72%

1.52%

September 2015

731

204

$194,511,846,594$172,762,701,497$367,274,548,091$21,013,137,803,000

0.93%

0.82%

1.75%

December 2015

806

152

$220,510,061,528$83,908,671,706$304,418,733,234$21,743,185,305,000

1.01%

0.39%

1.40%

March 2016

876

163

$233,211,897,890$76,375,785,975$309,587,683,865$21,519,514,704,000

1.08%

0.35%

1.44%

Share Turnover %Float Turnover %R1000
June 2015

ShareChanges
212

FloatChanges

Share Turnover

35$149,784,386,100

Float Turnover

Total Turnover

MV of Index

Total Float andShare Turnover$78,365,708,897$228,150,094,997$20,900,118,094,000

0.72%

0.37%

1.09%

$19,366,779,562,000

0.87%

0.48%

1.34%

September 2015

261

38

$167,727,294,150$92,521,636,808$260,248,930,958

December 2015

311

32

$188,180,751,025$61,400,420,387$249,581,171,412$20,082,552,607,000

0.94%

0.31%

1.24%

March 2016

321

32

$204,570,735,970$62,566,814,595$267,137,550,565$19,952,357,867,000

1.03%

0.31%

1.34%

Share Turnover %Float Turnover %

R2000

Share
Changes

Float
Changes

Share TurnoverFloat Turnover

Total Turnover

MV of Index

Total Float andShare TurnoverJune 2015

460

142

$31,548,444,760$85,687,022,506$117,235,467,266$1,875,901,762,000

1.68%

4.57%

6.25%

September 2015

470

166

$26,784,552,444$80,241,064,689$107,025,617,133$1,646,358,241,000

1.63%

4.87%

6.50%

December 2015

495

120

$32,329,310,503$22,508,251,319$54,837,561,822$1,660,632,698,000

1.95%

1.36%

3.30%

March 2016

555

131

$28,641,161,919$13,808,971,380$42,450,133,299$1,567,156,837,000

1.83%

0.88%

2.71%

FTSE Russell | Market Consultation – June 2016

10Responding to the Consultation
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/9RYYY3V
The consultation will close on July 29, 2016. All responses will be treated as confidential. FTSE Russell
may publish a summary of the consultation results, but no individual responses will be published and norespondents will be named. If you have any questions about this survey, or if you encounter any technicalissues, please contact rpawson@FTSERussell.com.

For more information about our indexes, please visit ftserussell.com.
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FTSE Russell

11About FTSE Russell
FTSE Russell is a leading global provider of benchmarking, analytics anddata solutions for investors, giving them a precise view of the market
relevant to their investment process. A comprehensive range of reliable andaccurate indexes provides investors worldwide with the tools they require tomeasure and benchmark markets across asset classes, styles or strategies.
FTSE Russell index expertise and products are used extensively byinstitutional and retail investors globally. For over 30 years, leading asset
owners, asset managers, ETF providers and investment banks have chosen
FTSE Russell indexes to benchmark their investment performance andcreate ETFs, structured products and index-based derivatives.
FTSE Russell is focused on applying the highest industry standards in index
design and governance, employing transparent rules-based methodology
informed by independent committees of leading market participants. FTSE
Russell fully embraces the IOSCO Principles and its Statement ofCompliance has received independent assurance. Index innovation is driven
by client needs and customer partnerships, allowing FTSE Russell tocontinually enhance the breadth, depth and reach of its offering.
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