An In Depth Look at Global Index Issues

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PETER HAYNES: Welcome to episode 51 of TD Securities podcast series Bid Out, a Market Structure Perspective from North of 49. I'm your host, Peter Haynes. And today, we listen in on one of the sessions at our recent portfolio management and market structure conference. A staple of our annual conference is to have key leaders from the index benchmark providers discuss important issues impacting index users. And there's no shortage of important topics this year, including the debate over eligibility of multiclass share structures in the S&P 500, which S&P consulted on in late 2022, the potential for China to be moved to standalone to index status, differences on South Korea classifications, and rule proposals to protect the S&P 500 from the next Tesla. Finally, we ask the since-departed head of Index Governance for S&P, Philip Murphy, a favor. Philip, please update your index calculations to use all markets pricing. The reason we asked for that is we can't have Canada appear dead to the rest of the world when confronted with TSX system outages like we had in November. Hopefully, this request will be something that will be followed up on by Phil's successor at S&P and we continue our dialogue with that index provider on this important issue. Before we listen to this panel discussion, a quick reminder to our audience. This podcast is for informational purposes. The views described in today's podcast are of the individuals and may or may not represent the views of their firm. And of course, the content of this podcast should not be relied upon as investment, tax, or other advice. I hope you enjoyed the discussion.

[MUSIC PLAYING] I want to thank our speakers for the next session for joining us. To my immediate left is Philip Murphy who's the managing director and global head of Index Governance at S&P. To the left of Philip is David Sol from FTSE Russell. He's global head of Index Policy. Planes, trains, and automobiles for this whole group, I think, our third speaker is Craig Feldman, managing director of Index Management Research at MSCI. Philip was circling half the night last night, getting here from New York, ended up landing in Hamilton. He knows where the hammer is, so that's a nice trip in, as we call it here in Canada. And more recently, Craig, you made it. I know your flight--

PHILIP MURPHY: Just barely.

PETER HAYNES: --was delayed. And when you said at e o'clock, you hadn't left this morning from Newark. I thought there's not a chance you'd be here for 10:30. Thank you all of you. You've all come from another location. David from London, England, for you to come here today back in person, I want to say thank you very much to all three of you. And this is an area of personal interest of mine. I think everyone in the audience knows I started my career on the index management side, still follow this space very closely. I'm going to ask a lot of tough questions today. Having you here in person, again, I think makes that a little bit easier than on the phone or on Zoom. So we're I'd like to start with Philip is with asking a small favor, if you don't mind, on behalf of the Canadian market. Earlier this week there was an outage at the TSX. And it's the S&P TSX benchmarks that everybody follows on their screens. And unfortunately, when the system goes down like it did earlier this week, it looks like Canada died because all the charts go on a flat line. And that's because the index providers, or in your case, are using only TSX quotes. Can you help us in the audience reconcile that is something that you can fix for us so that on a go forward basis, you use all market quotes for your market, which I believe is the case in the US? Can you help us on that?

PHILIP MURPHY: Yeah, it is the case in the US. I think it's really a matter for us to-- it's a very recent event, obviously, Peter. But we're going to engage with Riz and the team at TMX. What I can assure everybody is that we have robust systems in place both in the input side and in the output side for dissemination. And so I think it'll be a matter that we really need to debrief about, have some just really serious discussion about, and weigh next steps. And it has to be considered from a number of perspectives within our firm as well as TMX I know, so all the appropriate people will be following up. And if the regulator is also get involved, we would, of course, welcome that and engage with them as needed, of course. So it's just very raw at the moment, but that's where things stand. And one of the issues that I think the industry would hope does not get in the way is the fact that your index is titled The S&P TSX Index. And I hope there's not a licensing issue that prohibits you from using the other indices or other calculations because that would, unfortunately, affect us. But, Craig, I want to just ask on your end. There was a small rebalancing going on on Tuesday when system outage occurred that impacted both S&P and MSCI. But the bigger question was when we looked at the rules, it's unclear what happens in-- what do you do in MSCI when there's a system outage in a market?

CRAIG FELDMAN: It really depends. So first of all--

PETER HAYNES: I think your rulebook's 750 pages on this, too.

CRAIG FELDMAN: Yeah, and there's a few ones tangential that you would have to look at the pieces together at times. But all kidding aside, first of all, it's a pleasure to be back here. I think it's our fifth year together. So it's really great to be here in person. I just wanted to say that off the top. To your question. So it really depends on the time relative to close and the length of the outage. I mean, obviously, we have redundancy and fallback measures in place. I mean, they came into place very straightforward and upfront during COVID measures and other crisis times. In Canada, actually, specifically, I believe unlike other markets, it could be one or two others that I'm thinking of right now, but we take a multiple pricing and source, I think, from the TSX, and I think we take it from the O exchange as well. So I think we in Canada's actually one of the, not aberrational, but ones where we take a consolidated feed. But in terms of the process itself, it depends how long and when it happens to what we flow back. But generally, it's using the last that we have that's a viable price if the outage is so elongated to the point that, obviously, files aren't being distributed, people can't NAV cut and the like.

PETER HAYNES: So Philip, let's start with-- that was the breaking news of this week. But there was actually breaking news last week that came from S&P, and that related to a consultation paper that you've announced and is now public. Were you reviewing a policy that's been in place since June of 2017 with respect to the eligibility in US indices of multivoting shares? What prompted you to revisit this topic now? And what can you tell us about the feedback you've received? I think there's been some meetings. I'll be at your meeting next week or on your meeting next week. What's been the feedback to date on that issue?

PHILIP MURPHY: So it's one of these issues, I think, that's evergreen in a sense there's really legitimate, of course, viewpoints on both sides of it. I think it was the intent of the index committee in 2017 to revisit it periodically. And as you know, Peter, in over the last several years, we've discussed it at the advisory panel. So this is kind of a formal, I guess, opportunity to revisit the issue and maybe seek additional clarity around what's in the methodology. I think the elephant in the room is that the rule actually states multishare or ineligible. But the elephant in the room is the voting issue and how--

PETER HAYNES: There's smart people out there that try to read the rules and judge their structure accordingly. I think we all know that.

PHILIP MURPHY: Right. So I think if you read the text of the consultation, you'll see that comes out very clearly.

PETER HAYNES: We're considering that as one of the alternatives. In a general sense, I know you really don't want to tell us what you're going to do, and I fully respect that. But generally speaking, like when I speak to the industry, I will tell you, generally speaking, there seems to be a view that representation is more important right now than anything else. Is that your sense or is it still too early to tell?

PHILIP MURPHY: Well, yeah, it's too early to tell. I mean, what our process is that, of course, we will have an open period. I think this one either ends the 30th or the 15th.

PETER HAYNES: I think it's the middle of December, if I remember correctly.

PHILIP MURPHY: OK. There's actually two. I'll give a plug for the other one on the 1500. The other one on some other issues around the 1500, that one closes on the 30th, has to do with market cap ranges and the liquidity. But on the multishare issue, we'll run our process. I suspect we'll get very well-rounded feedback. The structure of the consultation is a little new. We're essentially asking respondents to rank their choices. If you read the text, there's some choices that are mutually exclusive of others, and there's others that could be implemented more than one of them. So it'll be a robust discussion at the committee. We look forward to it, but I don't really have a sense of where it's going yet.

PETER HAYNES: So David, FTSE acted on this topic of multivoting shares right away in 2017 with a consultation that ultimately arrived at a rule that said, any security that has less than 5% of the votes in the class that's in the index would be removed in five years, and no new names would be added over that five-year period. I have to admit that I didn't think, ultimately, you would remove stocks from your benchmark, but you did. In September, you followed the five-year timeline right to a T.

DAVID SOL: We say what we do--

PETER HAYNES: Yeah, and I respect that. But I must admit I'm surprised that was the outcome. Did you receive any feedback towards the end of that just when people came to the realization this was happening and names would be impacted, including Canadian names? And do you have any thoughts on that decision at this stage?

DAVID SOL: So it shouldn't really come as a surprise. And the engagement with the market is in two ways. On one hand, we have public consultations. These are effectively surveys that go on the website. We get a feedback for four to six weeks. After which, we analyze that feedback and then try to figure out whether or not we need to adjust our methodologies or our frameworks. The other engagement is through our advisory committees. So we have 24 advisory committees consisting of roughly 300 members. These 300 members are drawn from asset management, asset owners, academia, and consultants. And they provide us feedback more or less every quarter on our proposals. Now indeed, in 2017, we ask the question, should there be in public hands a minimum amount of the voting rights? And at the time, 68% of respondents supported in the decision to introduce a minimum of 5%. And what we did at the same time is said, we're going to review this every single year and introduce a grandfathering period for constituents so that at least we prepare the market for this change. And over those five-year period, so from 2017-2022, we did not get any feedback in terms of changing that direction. So in that sense, after five years, September '17, September '22, the five years are up, and indeed, constituents that didn't meet the requirement were deleted. So in that sense, it was in line with expectations.

PETER HAYNES: And Craig, MSCI used what I'll call an iterative process here from a consultation. You had your users ask you about SNAP in 2017 like the others did. And ultimately, you decided not to address this issue after considering other alternatives. Why did you reach that conclusion and do you have any regrets with that decision?

CRAIG FELDMAN: Yeah, that was a lengthy one. I mean, from start to finish, from the SNAP IPO, from when we first started engaging, we wrote a white paper about it. We had a multilevel consultation and engagement around it. It was quite a polarizing and contentious issue as you well know. And we decided, ultimately, that we would keep our global benchmark what it was, so the purest, most aggregate representation of the investment opportunity set. And then we developed an alternative index, our voting rights adjusted index, which took into account. Now I'll tell you very straightforward that index hasn't gotten a ton of traction, which I think is a little bit of a manifestation of what we extracted from the consultation, leading us to not change. I will say this, I don't know if we're at-- and again, this varies regionally and even per state within the United States when we talk to people, but I don't know if we're at the point now where, let's say, an ESG or a themed index will take over for the aggregate global benchmark yet. But we certainly have started to see policies for asset owners starting to have alternative benchmarks as again as a policy, at least with a portion of their mandates. So I definitely we think, and I'm not stating anything that's already obvious to the audience or yourself, the direction of travel is to start to look at that more. But I don't think we're at the time necessarily to convert to a single benchmark that's not in our case at this point and no regrets.

PETER HAYNES: Yeah, so we'll definitely dig in on ESG and its impact on benchmarking in a minute here. Just before we get to that, Philip, I want to come back to S&P's decision on Tesla's inclusion, which in hindsight, the company got to be the sixth biggest company at $630 billion or whatever it was when it was added. And admittedly, it kind of parabolically increased over that window leading up to the inclusion. But there's been a renewed call, and I've heard this from some of your big users, to create some sort of rule that will allow you to avoid having a company get simply that big. Is there a way, and I'll ask you this as well, as the markets have evolved, companies are going public much later in their life they're more likely to be established companies than they would have been, say, in 2000 around the tech bubble? Should you consider the profitability rule a little bit now about whether that's still relevant in the context of today's market? And in that vein, would you consider a rule that would automatically include a name in the 500 to avoid the Tesla type, it's not the sixth, whether it's the 50th ranked or 50 beeps is the number I threw out there? What do you think? PHILIP MURPHY: Yeah. I mean, that was a difficult chapter for folks and for us to manage through. In many respects, I feel like it was a perfect storm. For all we know, Tesla may be a once in a lifetime thing, where you have this, essentially, the automotive industry being turned around and with incumbents having to respond to innovators like Tesla. And so for a company to get that big without gap earnings, never really seen that happen too often. So there's that aspect to it. I don't see anything quite like that in the immediate horizon, but I do acknowledge that addressing it through a rule change might be a good path. Now, forced inclusion, the S&P 1500--

PETER HAYNES: Totally runs contrary to the way your index is managed. I get that. I can understand the reluctance. But I'm wondering how else you can address?

PHILIP MURPHY: Well, the 1500, I mean, to compare apples to apples, we all three of us, I suspect, have indices which are selective and then have indices which are very, very broad. So of course, Tesla was in many of our indices. The total market index was, it's in there, it's still in there. The 1500, given that for the five, there's 500 companies, is by its nature selective. So you have to ask yourself, well, how are you going to select the companies? We do it with a combination of eligibility criteria. And then some guidelines that the committee applies when ads and drops are made. I think people, generally, the feedback, what I'll say about it is that people like the earnings criteria. They feel that it imbues a sense of quality on the 1500, that it's a reasonable bar for members of the 1500 to have to hit. So whatever we do, I don't think forced inclusion based purely on size is probably a likely path. But the other question putting inclusion aside is implementation. How do you represent it in the index and should it be phased, right? And that was a big issue. So I think that's something we could continue to look at. I will say that a lot of the difficulty that people had around the time were really due to tax because we were nearing year end. And the Tesla had to come out of the completion go into the 5. And that tax situation in the completion was an issue. And for us to manage indices based on tax is probably a bridge too far.

PETER HAYNES: For David and Craig, a phased inclusion for large events, are there-- let's say, for instance, China, and we'll talk about China in a second, but just more generally speaking around phased events, is that something you're getting pressure to do more often now? Do you guys find? Maybe I'll start with you, David.

DAVID SOL: Well, let's take the case of China. I mean, what we typically do with our advisory committees is actually figuring out, is there a need for phasing? And is it in two steps, and three steps, and four steps? What would the best way be? So I think it's just on a case by case basis. It's very difficult to introduce a rule and say in advance this is how are we going to phase it in. And the timing matters. The case of China, I think, will probably be very different from, let's say, the inclusion of bonds in our global bond index. I think so it's on a case by case basis. China is a multiyear process, right? So at the moment, it's about 25% inclusion, so call it roughly 7% of the FTSE index. And of course, it's conditional on progress being made by the Chinese authorities. Now, our view is that great progress has been made in terms of opening up the market, making it more conducive for international investors. But there are certain conditions that still need to be met. So I think the big two conditions is, one, there's a funding requirement. So if we think about China and opening it up, we need a Q fuel, right? So qualified foreign institutional investors. And if you have a free funding requirement, that is, of course, maybe not so interesting for international investors. The other, I would say, barrier at the moment is that if you trade on the main onshore market is that you execute a trade with one broker, let's say, you're buying shares. We then also need to sell those shares with the exact same broker, right? And again for institutional investors, international investors, you want more flexibility, so multiple brokers. So I would say those are the two conditions very specific to China. And so we have to see from market to market, how we implement it.

PETER HAYNES: So Craig, why don't I ask you on China? You put out a consultation paper recently just addressing China again. And there were a whole bunch of reasons why you need to see things fixed in China. Some were different than what David just mentioned a second ago. There was a settlement cycle, omnibus accounts, coordinated holidays, and access to hedging instruments. Can you give us a quick update on, in your view, where each of those issues stand? And what is the feedback you're getting on China?

CRAIG FELDMAN: Yeah, sure. So let me just take your prior question about. So we're completely open to it. We deem it as something that's often situationally appropriate, but not necessarily the norm. So we've done it with, obviously, a phased inclusion on China, which where there we started at 5% and now we're at 20%. We'll see where we go from there. We also did it with foreign listed securities in our Singapore index. We also did it with certain other market classifications. So effectively, where you have to sort of manage across your investor base and client base is how they want to manage turnover, and is it more a general consensus or is it more feedback idiosyncratic to a large asset manager who has operational difficulty? So normalizing that and then saying it's appropriate to phase, absolutely something we speak of obviously with our investors first and foremost and our thoughts when we do that. To China, so just let me clarify. So it's not a consultation, actually what we're doing. It's not a formal consultation. What it is is it's an extension of--

PETER HAYNES: You didn't use the word consultation in it?

CRAIG FELDMAN: No, it's not a consultation. What it is it's an extension-- so basically, it's been a while since we talked about China. It's been 20% in the standard index for a while. Those issues that were addressed--

PETER HAYNES: Craig, can I ask-- sorry to interrupt, but I just think it's really important. As a Canadian, I get confused. The A share portion of exposure in China, onshore stocks, you have 20% of the weighting of those names in your benchmark. David has 25. But that's only a small percentage of China in the emerging benchmarks. It's all the other classes of Chinese--

CRAIG FELDMAN: Which we're already in. MSCI China was already in and it's one of the very idiosyncratic aspects of China, the multiple shares, the red chips, the P chips, the A shares and the like. And so A share is the onshore.

PETER HAYNES: So we're talking if you're at 20 today and you were to go to 100, that would increase the emerging exposure of China by 7%. Is that correct?

CRAIG FELDMAN: I mean, depending upon how you look at it in pro forma, yes, 7% to 11%.

PETER HAYNES: So you'll go from 33--

CRAIG FELDMAN: About 32% pro forma to maybe 42%, somewhere around that.

PETER HAYNES: So with that said, where are we at on the As?

CRAIG FELDMAN: So we're not consulting. Really what we wanted to do was we felt it was a while since we engaged with the market on China. And obviously, it was something first and foremost that we discussed quite often and obviously, notwithstanding the backdrop of geopolitical tensions and the investor sentiment around that. So this is different. Investor sentiment, especially in the US and other regions might be very anti-China either for fundamental macro reasons or for geopolitical reasons. That's different than are you able to invest in it? And that's what we're looking at. And so we figured now was the time. Obviously, we go through our annual review every June in terms of market accessibility. We noted that there were some improvements in certain areas. But the four areas that you would highlight that we talked about as sort of missing in terms of being fulfilled, we've seen-- so generally, I will say that we've seen-- the direction of travel is positive, but how much is actually tangible and being felt on the ground by investors is a little different. And so there's been movement certainly on something like the alignment of the mainland and Stock Connect holidays. So we only allow Stock Connect eligible securities in our index now because that was the most viable medium to include when obviously our [INAUDIBLE] system didn't go through the reforms that it has as of late and the quotas were expanded. So generally speaking, they're making moves to align 40% to 50% of the holidays to try to address that. There's what's called the master SPSA initiative that they put out to try to address sort of omnibus-related concerns. The whole global trend, I think you mentioned it in your prior discussion, is moving to a shorter settlement cycle. So China is there. But what we really want to see is not just the cycle per se that might align now with a shorter settlement cycle globally, but a true DVP system that's managed--

PETER HAYNES: Pre-fundings initiative.

CRAIG FELDMAN: Yeah, and that's appropriate, so the funding that David alluded to. And then the existence of futures and options of derivatives, with hedging and--

PETER HAYNES: Is that getting better?

CRAIG FELDMAN: It's getting better. There's more listed around the issues, but obviously we want to see the use case of how people are using that and the prevalence of them. So again, it's not a consultation. We felt it was a little overdue that we went out to the market. Obviously, it's a very big and expansive consultation as we go along, but hopefully some of that feedback that we get will give a little bit better picture on again what always is our litmus test, how these stuff is being experienced on the ground, and then we'll make decisions from there.

PETER HAYNES: And so David, I'll ask you this question, and Craig, get your opinion as well, but Craig mentioned geopolitics. And obviously, that is the elephant in the room. And what happened with Russia happened really quickly. All of a sudden, Russia became an uninvestible market and it needed to move to standalone status. And I'm sure there's people in this room still trying to figure out how to sell their Russian shares or may never be able to. Two reasons why China could be standalone. One is because of potential geopolitical issues, and two, because people think it's too impactful on emerging benchmarks to start with. It's not developed, but it's too big for emerging. Do you see a pathway, David, where China could be considered a standalone benchmark, which would eliminate some of the risk associated with geopolitics, but also address the fact that it's just disproportionately too big within emerging?

DAVID SOL: I think there's two elements to that question. One is actually what is the policy with regards to sanctions? Now within FTSE Russell, the policy is that if a company is subject to sanctions in the US, UK, and the EU, it will be removed from the index. So that's the rule. If you look at China, of course, going back when the executive order was issued by President Trump, at the beginning, it wasn't entirely clear which securities were actually within scope. So there was confusion in the market. So we then held a consultation with clients, index users, to figure out which securities are in the scope, and then we came out with a list of stocks that were removed. Russia, similar situation where on one hand, you have indeed certain stocks that were subject to sanctions. But there, the market became not replicable. It was very difficult for people to actually execute trades. And then we removed Russia from the index. I think it's important to put in a context of what are the rules and how we have reflected that. To your question, which I guess is around also concentration, we have offered in both the case of Russia and China the options of creating indices that simply remove them. So investors can have the same index, an emerging market index with or without China. That option is out there. I would say that actually we have not seen much take up yet.

PETER HAYNES: Yeah, you need to force the issue with the primary benchmark. I think that's the question of whether you would be willing to do that to address-- so I think what you're saying is it doesn't sound like you'd be willing to do that unless you get a significant amount of pressure. But what I worry about is that pressure is only going to come after something happens in Taiwan, and you'll be forced to do it. So you're right, there's two issues here.

DAVID SOL: It's two issues, but I would say as an index provider, we try not to take a particular political view on the matter. So we are guided by the market, we are guided by our advisory committee. So if indeed the feedback is that we need to adjust our rules to make our indices more reflective, of course, then we'll take that into consideration. But that signal has not been so strong, let me put it this way, so far.

PETER HAYNES: So Craig, talking about politics, I actually remember when you were debating adding China to your A shares, to your benchmarks, it actually became a political issue with the Chinese government. How are you looking at China from a standalone-- that debate-- versus geopolitics right now?

CRAIG FELDMAN: Yeah. Maybe two things, and then I can talk a little bit more about it and with Russia as well. So first of all, our standalone markets criteria, but that goes for whatever criteria we're talking about within our market classification framework, has nothing whatsoever to do with geopolitical ramifications. Zero. So we're well aware of the sentiment. We would be remiss if we didn't take note of it. But the expeditious move of Russia to standalone, even though it was spurred on by obviously the Russian-Ukraine situation had nothing to do with the geopolitical impact because that's not a market accessibility factor. What happened is that every market accessibility factor started to degrade at such a pace and level that it moved to standalone market status because that was the criteria that we have within our methodology. China doesn't. China has a very, very tense and interesting geopolitical backdrop right now, again, United States and beyond. And notwithstanding all of what's transpired with obviously the USEO that David was alluding to that Trump camp, but also obviously just with general tensions around Hong Kong, Taiwan, the like. So there's a number of things. But none of those go into our decisions of classifying something as standalone and certainly.

PETER HAYNES: Do you struggle with the idea of going to standalone for purposes of concentration at a time when it might be perceived as though you're doing so to frontrun geopolitical?

CRAIG FELDMAN: That's not the way we define standalone though because the way we compromise and the way we construct benchmarks is to have the most accurate and fair and aggregate representation of the market opportunity set of the investment opportunities, from a free float adjusted market perspective. So whether that's 42% or whether that's 50 basis points, the opportunity set is the opportunity set. Now in fairness, and even before China started to be added to our MSCI China index, there was always talk about, will EM start to become more Asian-centric or China-centric? And so the ask of investors to have EMX China or EMX Asia or whatever it might be, noting the concentration, I think that's fair. And that's something, obviously that we look at either from a increased to expand our offering standard-wise or obviously customization. But the standalone criteria, the way we have it within the market classification framework, is really reserved for those on the lowest end of the totem pole in terms of access and investability.

PETER HAYNES: While I have you on that topic, South Korea. Has anything changed in your mind? FTSE and MSCI differ on South Korea. FTSE includes it as a developed and MSCI does not. So I'll ask the person that does not include it. Anything changed? Can you just remind the audience why you do not consider it developed? And is it moving in a direction whereby you might change that view or just not change that?

CRAIG FELDMAN: Yes, of course. And I think it's always been the divergence across us, or at least from us to you guys. So it's never a question. So we have size and liquidity factors that go into our decisions around the markets as well as a GNI criteria. But I mean, what's Korea? The ninth largest GDP or something. It's something like that, ninth or 10th largest GDP in the world. I mean, there is no issue of the depth and breadth of the opportunity set of the Korean equity market. But where we differentiate a bit from FTSE and S&P in terms of why we define it as an emerging market is because-- and we've had them on the review list in years past right for several years and they didn't address it. Not just from our perspective and letter of the law to the methodology, but also from what investors were telling us. So these issues around having a global-- remember, if it's going to go and be promoted to developed markets, it really can't miss on any of the criteria that are deemed essential. And obviously, they have to meet it to the highest regard. So in their FX market or the FX market liberalization, the fact that we consider inaccessibility, the fact that there's not 24-hour trading and ease of convertibility of the won, the fact that they had restrictions on data licenses in terms of access to data from exchanges and also the creation of financial products around that, which is a criteria of ours as well. The fact that they had a very rigid ID system. So they didn't roll out an omnibus fully, which they've started to roll out now and test a little bit more. So it's moving in the right direction. But again, these things that we've highlighted historically haven't been met not just to the standpoint from an MSCI perspective, from the standpoint of the investors we speak to. And so we're never close to something. But given it's been on the review list in the past and they didn't address those to our investors' liking, then obviously if we're going to put it up for review again, we want to be reasonably sure that those issues will be addressed because the last thing we want to create is a lot of vacillation and variance in the benchmark.

PETER HAYNES: And so David, why then would those issues that impact MSCI not be issues that your users would be complaining about and allowing you to consider it a developed market?

DAVID SOL: So it is roughly the same metrics. But I think from index provide to index provide, you might draw the line at a slightly different points. So within our framework, the FTSE Russell framework, the conditions were met that would allow Korea to be part of our developed index. I think the interesting bit actually this year is that the Korean government has undertaken a very strong reform program that has impact actually on our-- or actually, it has impact on our watch list. So we've had put now Korean bonds on our watch list for our fixed income indices.

PETER HAYNES: Watch list to move up?

DAVID SOL: Exactly, to move up. So the watch list is where we kind of say something is happening.

PETER HAYNES: I'm sorry. We still have a country's bonds at a different classification as its equities. Is that the only one?

DAVID SOL: Is it the only one, I would need to check. But definitely the reform is very strong, especially the element of withholding tax. I think that's a big-- so there's a fiscal element on the bond side that was not conducive so far. So we're monitoring that very closely. It is on the watch list and then with potential for promotion.

PETER HAYNES: There's a new administration there too, so we'll see what happens. So Philip, bring it back to local domestic benchmarks, which is what S&P is known for I think in terms of your brand. But just before I get to that, something's happening in the US that I never thought I'd see, and that is that you actually have stocks that are bigger in your benchmark on a relative basis than Canada does. And what I'm referring to is Microsoft and Apple. Apple is over 7% of the S&P 500. To my knowledge, it's never been there. There's never been a country or never been a time, correct me if I'm wrong, where there's been a stock bigger in the S&P 500 than today. IBM was in the 60s during the '80s. But you have both Tesla-- excuse me, Tesla. You've got both Microsoft and Apple at 7% and 6%. I'm just looking at, again, establishing a rule before it's a problem. I know some people say 25% of the top five names. That's a rule for some people in terms of their benchmark. But we're getting to that 10% potential. And we've found it to be a red line here in Canada that nobody wants any stock more than 10% of a local benchmark. That goes back to the days of Nortel for Canada. Can you envision S&P establishing a rule to cap the individual weighting of a name in the S&P 500, which I admit I didn't think I'd ever say?

PHILIP MURPHY: That's hard to imagine.

PETER HAYNES: And I will bring this one up next week at the meeting.

PHILIP MURPHY: All right, fair enough. It'll be good to get other people's input about it. I read your piece recently in your note that gave a little bit of the history in the Nortel situation, and of course, we have the cap versions here in the country. So yeah, I could definitely envision a new benchmark that people can choose to use which would be a capped version of the 500. That's imaginable for sure. So if that turns out to be the preferences of a serious group of index users and stakeholders, we could do that. But market cap weighting represents the market. So it's hard to imagine the headline 500 moving away from that.

PETER HAYNES: Look, I argued against capping in Canada for a long time when the Nortel debate for that exact reason. This is the market. There's other spaces where you're starting to have to address the market as it's defined, and I'll talk about ESG specifically. So we have so many dollars chasing a narrow definition of ESG. And it was an issue that you had to face a few years ago with a very popular benchmark called the S&P Global Clean Energy benchmark, where literally it got too big. And in order for you to be able to address that, you needed to-- no other way to say it-- soften the rules, broaden the potential for inclusion, and arguably lessen the cleanness of that benchmark. How are we going to deal with that issue as ESG mandates become even more important? And Craig, you mentioned earlier the idea of the ESG benchmark becomes the benchmark. I want you to think about how are we going to deal with that from a capacity perspective? But first, I'll start with you, Philip.

PHILIP MURPHY: Yeah, it's a great question. I think if you look at the history of global clean energy, it was launched in 2007. It did have a relatively narrow constituency. And it was viewed really more as a thematic index than an ESG, pre-ESG.

PETER HAYNES: It was called the theme back then. Now it's called ESG.

PHILIP MURPHY: Yeah. So there's this confluence between the two. And themes, generally speaking, because they're themes, tend to be more narrow. But of course, as they get adopted, you have the creative tension I suppose in index design between capacity and purity. So one thing we're doing is making very clear that part of the design process should take into account the use case for an index as well as capacity, given whatever expectations we have for the index and its use case. So it's an ongoing challenge. And I think in the case of Global Clean Energy, we came up with a good solution. It could be debated that it's less pure, but on balance, we thought we landed in a good spot.

PETER HAYNES: So Craig, capacity. We're going to run out of capacity at companies that are quote unquote deemed clean or deemed high standard ESG. Is that a topic when you're talking to investors thinking about ESG benchmarks? You're just telling them, look, you can't simply access that amount of capital in that space.

CRAIG FELDMAN: It's a good question. I'll try to give you a-- so one is I think that what we've observed the last few years in terms of, let's say ESG-- I don't put climate in ESG together. Let's say ESG and climate. There's two very palpable drivers there. The first is that investment managers are looking beyond just a fiduciary responsibility. They're looking at the sustainability and social responsibility as well. And the second is regulation. And those two forces are coming quite hard and quite active and pump fluid, a lot of it out of Europe, but in other regions obviously as well. And we have this continual discussion on our ESG offering and our climate offering on advancing the indexes to meet either regional or overall global demands that are of regulation but also not creating undue turnover and also not advancing too slow. So we're keeping pace but giving some consistency. So there's a lot of this sort of confluence of factors. My true belief, and back to my earlier point, is that if you start to have enough convergence of that drive to be more socially responsible and sustainable-- by the way, cross asset, not just in equity, cross asset, along with an ever-growing regulatory umbrella, that leaves very little room for optionality around meeting that criteria, then I think it may be a fait accompli. It's just a question of when, not if.

PETER HAYNES: And David, from the discussions you're having with investors around ESG in the context of broad benchmarks, is there a push now to-- we talked about votes earlier, but with respect to broader issues around ESG, is there a push? Are you seeing a significant movement away from broad benchmarks to ones that are more narrowly defined to meet certain ESG standards?

DAVID SOL: Well, let me come back on your earlier comment around concentration because you mentioned Apple and Microsoft. In the SI space, in the sustainable investment space, there's typical names that you see on those indices, so it gets exacerbated. But I wouldn't say there's a shortage of product offering. If you think about the roughly three things that we offer now, very simplifying things, one is offering indices where you exclude certain criteria, like based on, let's say controversies or conduct of a business. So we have launched this year the FTSE Canada Ex-Fossil Fuel Index to address of course certain needs here for the fixed income market.

PETER HAYNES: Is that users that are non-domestic-- looking at the FTSE Canada Ex-Fossil Fuels, is it non-domestic people interested in that or domestic?

DAVID SOL: It's mostly domestic. But I think if you want to access the Canadian market and you want to do that in from an ESG lens, you will have to look at those type of indices. And I think there is an increasing interest from non-domestic investors. The second way of working on this hypothesis by tilting. So you have an index with a particular, quotes, headline index and then you tilt the index such that particular features, ESG scores, carbon footprint profiles, are more desirable. So we have products in that range. And then you have indices that try to pursue a particular objective. So perhaps a decarbonization trajectory, which we see actually a lot in Europe like the so-called Paris Aligned Benchmark or the Climate Transition Benchmark where you actually have to decarbonize a certain percentage every single year. And here in Canada, we launched the FTSE Canada Green Impact Bond Index. So that was also in the category. What I really want to say is there is no shortage of offerings. I mean, in that sense, although we have pockets where I'd say there's high concentration in certain names, there are so many ways of looking and slicing up this space, different data sets, green revenues, carbon footprint profiles, ESG scores, that you can create many, many different indices.

PETER HAYNES: So where's that game on right now? Ben, are there any questions online? Does anyone in the audience have a question for our index providers? Just wait for-- there's a microphone coming for you.

MAN: I think this is a frustration that I feel is that you are trying to become more adaptive and react to investor preferences. And we always seem to launch new indexes to do that instead of maybe improving the core index. Why is that? Is it that you don't think these are permanent trends, is it that there's too much money following them, is it that you don't want to be first? What are the reasons that instead of improving the core, you're always launching a new index? Because the problem is that these are very thin slices, these indices that were launching, and they're not going to get traction. I think it's expensive for you to launch a new index that doesn't get followed. I would assume it's work and it's not a profit.

DAVID SOL: Yeah, it's a very good question. But I think one of the challenges is that sustainable investing means different things to different people, also per region. So what sustainability means in Canada is different from what it means in Europe, is different from what it means in China, is different what it means in Japan. So with different types of opinions and accommodating kind of the desires of clients, you end up producing different type of indices. Now in Europe, the indices are very much driven by regulation. So the framework there, the so-called EU taxonomy, is actually driving how products look like, which is quite different of course, from what we've seen in the Americas. So in that sense, we are adapting to the drivers in local markets. And the other dynamic is a lot of customization. So even within one region, you might have different pension funds, different insurance companies wanting to have their own exclusion list because they feel that they don't want to have exposures in the portfolio to certain aspects. And we accommodate for that. So we accommodate in the customization. But again, then you get a plethora of offerings. But I think it comes with the complexity of sustainable investing and the different desires that investors have.

PETER HAYNES: Final question for-- sorry, you had a point Philip?

PHILIP MURPHY: I just wanted to raise one quick point related to that question, which is a great one. There's a governance concern about it baked into it. Because you can imagine there's an objective to an index that's kind of a core concept. So at our shop, when a committee is looking at a potential change for methodology, it's going to ask the question, is it consistent? Is it helping the index to achieve its index objective? And there are some changes which will fundamentally change the characteristics of an index and alter the history. It will alter the record going forward such that it might not be consistent with the record in the past. So it's always a challenging question. Global Clean Energy is an example where we did change an index. And the question became, are we staying true to the spirit of the index? So it can go both ways, actually.

PETER HAYNES: Was your comment specific to sustainability or was it a generic statement about index providers? Yeah.

MAN: Geopolitics. [INAUDIBLE]

PETER HAYNES: Yeah. Final question for each of you. I was going to ask something else, but I brought it up because I know David, you brought this up at lunch. How many indices do each of you organizations-- I think this is part to the question. David, how many indices do you run right now?

DAVID SOL: Over one million.

PETER HAYNES: How about you Craig?

CRAIG FELDMAN: It's just short of that.

PETER HAYNES: And how many have you got Phillip?

PHILIP MURPHY: Well, legacy SPDJ--

PETER HAYNES: I mean, you're putting custom and standard. I'm talking every index you calculate. You're over a million?

CRAIG FELDMAN: Absolutely, yeah.

PETER HAYNES: Are you over a million as well?

PHILIP MURPHY: I think we're getting close with the combination with market.

PETER HAYNES: That's unbelievable really at the end of the day. OK. First of all, thank you. First of all, Craig, thank you for circling and getting in. Thank you for coming from Hamilton, Philip, and David from London. Thanks very much, guys. I really appreciate the time.

PHILIP MURPHY: Thank you.

PETER HAYNES: That's great. Thank you very much.

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