Top of Mind Global Index Issues for Equity Managers

PETER HAYNES: Welcome to episode 56 of TD Cowen's podcast series Bid Out, a market structure perspective from North of 49. My name is Peter Haynes, and today, we dig into current index events with representatives of three of the world's most important benchmark providers, S&P, MSCI, and FTSE, who, together, spoke on a panel at our recent 24th annual portfolio management and market structure conference held on November 2 in Toronto.

Over the past couple of months, executives at Blackstone, Palantir, and just today, Uber, have all highlighted S&P 500 index inclusion as part of keynote discussions about the company, as if index status is part of regular earnings or company updates. It seems like the role of the index provider, especially in the US with S&P, is becoming even more important by the day.

So it is great that we had a chance to ask one of the index committee members who runs the S&P 500 from S&P for thoughts on whether the 500 index is simply becoming too important. During this 45-minute panel discussion, which you're about to hear, we dig into the concerning trend of domicile changes to the US and the overall concentration of the US market in global benchmarks.

We talk about the debate over multi-voting shares, which will never seem to go away, and the status of China A-shares in emerging benchmarks. Finally, we address the likelihood that South Korea will move to develop in MSCI, an outcome that seems a lot less likely today after the country imposed new short selling restrictions on the weekend. And that, of course, happened after our conference speech, so we'll see what that does. So sit back, enjoy the next 45 minutes from our market structure conference on index benchmarks.

So this is year 24 of our market structure-- portfolio management and market structure conference. One of the topics that's been a staple at this event is the topic of index-- indices and index providers. In fact, Louis Bellucci's colleague from-- former colleague from S&P was a speaker at our first conference, David Blitzer.

And obviously, it's a topic that's near and dear to my heart, as I started in-- sorry, I started my career in this business working at the TSE's index department when they previously ran the benchmarks. And so we're going to go through a deep dive on some really important global index issues. For those of us that are nerds on this topic, we could talk about it all day.

But we've got three experts, new faces, for this audience up on stage here. I'm going to start on my far left. We have Raman Subramanian, who's global head of solutions research for MSCI. In the middle, we have Ricardo Manrique, who's head of strategy benchmark and index solutions at FTSE. And to my immediate left is Louis Bellucci, who's head of committee management for-- and index governance for S&P Dow Jones.

So, gentlemen, welcome to Toronto. Thank you for coming today, and I look forward to a detailed discussion on index issues. And Paul-- or Paul, my goodness. I don't know why I'm saying Paul. Louis, I'm going to start with you, as I have a, I'll argue, probably a little tougher question right off the bat, and that has to do with Canada, and it has to do with our benchmarks.

So, a couple of weeks ago, S&P celebrated their 25th anniversary of being in Canada and being responsible for our domestic benchmarks. I remember back in 1998, when S&P took over Canada from the TSC, that I was concerned that there would be a US influence on our benchmarks. And I will tell you David Blitzer did a phenomenal job of ensuring that those benchmarks remained very made in Canada, with all of our idiosyncrasies related to our market.

And that, I would argue, wasn't something that I worried about until fairly recently when in June of last year, I believe it was-- June of this year, I should say, Ritchie Brothers, which was long considered a Canadian company, was removed from the S&P TSX Composite index, and that caught us by surprise.

What we hadn't realized was that, I guess quietly, rules that were specific to Canada that used to say Canadian corporation is what kept you in a Canadian benchmark were changed in favor of the approach that S&P has taken globally. And I would say that if you were to apply that rule to some other Canadian companies, we might see more names that move out of the Canadian benchmark, south of the border, where Ritchie Brothers is now eligible for inclusion. Louis can you help us in the audience, just calm us down a little bit about what happened there, and is this something that you expect will become a trend in terms of Canadian names becoming US benchmark names?

LOUIS BELLUCCI: Thanks, Peter. Yeah, I'll try my best, and I'll try my best to fill those large shoes of David Blitzer, as well. I think to answer this question first, we have to understand the methodology, right? So S&P Global's-- S&P Dow Jones Indices global domicile policy is a multifactor approach. It takes into consideration principle factors, which are company headquarters, company incorporation, and listing.

There are secondary factors in addition to those, especially when those three principal factors do not match, things like geographic location of assets, revenue, board composition, location of executives, employee base, and so on, as kind of necessary for each individual company. So in the-- as you mentioned, in the S&P TSX methodology, there was additional domicile language, but it spoke to the same things.

It spoke to incorporation, it spoke to listing, it spoke to filings, and it mentioned several of those other secondary aspects, as well-- I'm going to read it off here. Substantial presence in Canada based on location of head office, headquarters, executives, or substantial portion of revenue or assets, so substantial portions in Canada. You see the consistencies between those.

So there was a point in 2022, during our annual methodology review, a decision was made of this is duplicate language. It has the same intention, the same spirit, and hopefully, you can-- by reading that off, you can see some of that. We're going to take that out of the individual index methodology-- we have 700 or so index methodologies, and maintain all of them on a regular basis, right? So we're going to point that to the global policy, which is, again, consistent with what is being applied or had been applied in the past. So it wasn't a change in methodology that led to the Ritchie Brothers classification-- domicile moving to the US.

There was also a question there, Ritchie Brothers changed its headquarters. When they renamed themselves RB Global, they changed their headquarters to, I believe, it's in Michigan, to US. Was that the reason for the review, and was that actually the determining factor in making that change? The answer to that is also no.

What happened, right? So what happened was there was a cross-border merger, Ritchie Brothers and IAA combined. Both of them were approximately $6 billion. IAA is slightly less, Ritchie Brothers slightly more than that.

And so the two companies combined, and we have a new entity, RB Global. And the committee was tasked with determining what is the domicile for RB-- new RB Global, right? So they went through the factors, like dual listed, of course. We know it's incorporated in Canada still, headquarters was US, so we have some differences there. 70% of revenues, 75% of assets, I think 2/3 of employees, six of nine board members, 10 of 11 executives, US, US, US, US, US, so the eventual decision there was made by the committee to domicile RB Global as a US company.

So that's the background there. I wanted to just emphasize it was consistent. That decision was consistent with the methodology. But that methodology also is not set in stone, right? Prompted off of that-- but this is not a new topic either, right? It's becoming more and more prominent.

I think there are 98 dual listed companies within the 227 in the S&P TSX composite, I believe. You can check my math on that.

PETER HAYNES: I don't have those numbers off the top of my head.

LOUIS BELLUCCI: Yeah, I did a little bit of research. So it's a topic that is becoming more and more prominent, and we want to make sure that we're looking at the methodology, listening to that feedback that we've received, following that, and what kind of changes maybe are necessary.

PETER HAYNES: Is it possible that because where we would push back-- I'm being the royal we for Canada, would push back. Was there actually-- we feel there was a methodology change because the fact, though, if it's incorporated, nothing changes. And in that sense, nothing changed for Ritchie Brothers because its incorporation remained in Canada, whereas in other instances, the incorporation might have changed, in which case we understood the company would no longer be considered a Canadian.

Are you saying, then, that you might-- this is something we haven't heard the last of, such that we might see a form of consultation of some sort? Isn't that something maybe that would make sense is why don't you ask the market? These are complicated questions because so much, and I know it's a theme of this discussion today, is going to be around concentration of assets in the US market and what that's doing to hollow out global markets. But regardless, is it safe to say that we have not heard the last of this?

LOUIS BELLUCCI: It's safe to say that, yeah. Any material change to an S&P Dow Jones Indices methodology goes through a consultation process, where we would reach out to--

PETER HAYNES: So we would argue, and what I will say is, that removing incorporation in Canada would have been a material change to the policy where there wasn't a consultation. So that-- again, that's the perspective we came at it, and whether that internally is agreed upon or not, what I'm encouraged to hear is that S&P is listening to the feedback that they heard from individual brokers but also from your advisory meeting that you had last June.

LOUIS BELLUCCI: That's right. And I can take that a step further and tell you about some of those things that are under consideration.

PETER HAYNES: Yes, please.

LOUIS BELLUCCI: Yeah. So your comment that the S&P TSX is the domestic benchmark, we take that to heart, and that's important. So there's an option of making an index-specific domicile rule for the S&P TSX. There's downsides to that, and that's some of the early feedback that we've gotten, is there's the potential of overlap between, let's say, the US 1,500 and the TSX Composite or 60.

And as an important piece of a global portfolio, that's an undesirable outcome. So that leaves us more on the global policy side as opposed to index-specific rules. On the global policy side, things under consideration, things like carve out for dual listed US and Canada, it's a very unique dynamic. And like I pointed out, it--

PETER HAYNES: is, yes, because everyone thinks of-- globally, they think they're DRs. No, they're not. Exactly the same security. You heard from our CEO of our regulator earlier today about multi-jurisdictional reporting and the fact that the two countries essentially accept each other's reporting. So it is a unique situation.

LOUIS BELLUCCI: Yeah, absolutely. And it perhaps warrants some form of carve-out within the global domicile policy. So it's maybe a stronger tilt towards incorporation, like we've just talked about, or potentially a scaling factor of some form to address the differences in size between the US and Canadian.

PETER HAYNES: So one of our fears is that incorporation is a complex change. Could be tax related in terms of the issuer having to change domicile and then face some tax consequences. But headquarters is pretty much the stroke of a pen. It's almost arbitrary.

We have companies in Canada right now that may generate more revenue in the United States, making sense, or big global companies-- obviously, they're going to generate more revenue in the US-- that could just say, our headquarters is now in New York. And that would be the fear that we would have, that it's not necessarily names people are thinking about today. It's names that could be amongst those 97 down the road that just decide, hey, we're going to talk a little bit about how important the S&P 500 is in a minute. That's the goal. So that would be the fear.

LOUIS BELLUCCI: Right, and that's why I wanted to highlight, is that the review of RB Global was following a significant cross-border merger, where we had, really, a true, new entity between what was formerly a US domicile and a Canadian domicile of similar sizes merging together, and that's where that review came from. It was not prompted by a strike of a pen on a piece of paper.

PETER HAYNES: And I'll apologize to Ricardo and Raman who are spectators on this very made-in-Canada issue that I had to get off my chest, OK? So we're going to move the conversation to be a little bit more global. I'm going to come over to you, Raman. So I mentioned earlier this concentration of capital. Let's use some numbers here.

Back 10 years ago, MSCI ACWI had 47% of its assets in the United States. Fast forward to today, 63% of ACWI in the United States. 10 years ago, the top 10 companies in ACWI represented 7% of the index. Today, the top 10 companies in ACWI represent 17% of the index, and all 10 are US companies.

So we have this flight to capital in the US. We have diversification going down. I'm just curious from a global perspective, as you look at benchmarks is this a topic, Raman, that you hear from investors who are concerned the US is just becoming too big relative to other markets?

RAMAN SUBRAMANIAN: It's a great question, Peter. So you talked about ACWI. If we look at world benchmark, which developed market benchmark, that number is 20% for the top 10, and all of them are--

PETER HAYNES: Which--

RICARDO MANRIQUE: MSCI World Index.

PETER HAYNES: The World Index, right. Yeah, OK.

RICARDO MANRIQUE: 20%. And then if you look at the weight of US within the World Index, it's close to 70%. So this is not a common issue, although it's exaggerated recently. But in the past, it has happened. This is not the first time you are seeing.

If you look at the EFA benchmark or EAFE benchmark, depending upon where you are calling it, Japan used to be around the same number in the '80s. And investors here have done a lot of things to mitigate the effects. So one of the things they will say-- OK, let's broaden it, maybe go into small cap, include the small cap. But it reduces the weight of the top 10 maybe from 17% to 15%. It will not change drastically.

Or they will say, maybe what I'm going to do is that I'm going to use a different weighting scheme. I remember Rob Arnott used to come and talk about fundamental weighted indexes, isn't it, value-weighted. We had GDP-weighted indexes back in the day.

But the moment you go from, say ACWI value cap-weighted to GDP-weighted, the weight of US goes down from 60% to 30%. Now, in Canada, if you go to any of the institutions from CDP to CPP, all those bigger guys, the reference portfolio for them is a cap-weighted benchmark. So if the reference portfolio or the policy is a cap-weighted benchmark, and if you're managing your money against a GDP or non-cap-weighted index, you're taking huge active risk. It's a career risk for them, isn't it?

So most of the time, they will wait for the benchmark, the valuation to make it correct itself. But in the process, what they'll do is they'll expect the active managers to kind of work around the problem. So even Canada, if you think about this, it's a double-edged sword for them. One is that Canadian market itself is more concentrated. The top 10 here is about 40% of the benchmark.

On the top of that, most of the Canadian investors are home buyers. So if the weight of Canada is 3% in the ACWI benchmark, they put 30% in overall weight. So it's a bit of a bigger challenge for Canadian investors in that perspective, but I would say that, you know, if you think about long-term mean reversion take place, markets go through these valuation cycles, and people want to wait and work it around. But those who are more worried about it-- always they go for different strategies from GDP-weighted, sometimes equal weighted, and there's no one right solution, and that's something need to be actively managed.

PETER HAYNES: But I'm fearful this time around of Japanese tech IPOs. There's a story recently suggesting that all the new tech IPOs that are Japanese companies are going to IPO in the United States. You had Arm that went to the United States. You had CRH from the FTSE move over to the United States.

In each case, they're justifying it in some way, shape, or form about their participation in the US. CRH is an infrastructure company that has a lot of business in the US. What if we don't mean revert, and we continue to see more concentration in the US market? Maybe that's not a bad thing, because you're still Investing in companies that have global exposure. But I don't know how when you're talking to global investors that are thinking about that.

RAMAN SUBRAMANIAN: So most of the people don't go for country-based allocations now. Many of them use a global equity starting point, so they have started using ACWI or maybe MSCI World as the allocation point. They may have a carve-out and say, OK, I want to take a country bet or macro level.

They may give allocation to US or non-US market, a single-country market, but then predominantly, their starting allocation will be a global benchmark. It's the MSCI World. It could be FTSE All-World. It could be S&P Global. That's where they're starting. And then they may say, maybe I want to overweight-underweight, take a tactical view on a single country, and that's how you manage the kind of concentration risk.

PETER HAYNES: So let me come back to you before I ask you about the S&P 500. Do you have a sense, because S&P is well known to be a domestic benchmark provider in the US and Canada and Australia and other jurisdictions, do you have a sense that domestic benchmarks are becoming less relevant for global investors?

LOUIS BELLUCCI: We can look at them, I think, as building blocks, right? And I think it's similar either from a top-down or a bottom-up view. So no, I don't think that they're more or less relevant. I think that as far as constructing those domestic benchmarks, create an opportunity to, again, express an opinion, is overweight-underweight, where do you want your exposures to lie? So I'll stop there.

PETER HAYNES: So let me come back to-- I mentioned the Holy Grail of index inclusion for companies the S&P 500. So I'm going to quote a couple of CEOs here, one from a few weeks ago, Blackstone's Stephen Schwarzman. Here's what he had to say when his company got included in the index. Quote, "That's a big one, actually, because it forces people who don't like you to buy your securities."

He added-- this was part of a private equity speech he was making at a conference-- "We worked on that"-- meaning S&P inclusion-- "for four years. I spent a lot of time on it, and I'm very happy about that one." Again, this is Schwarzman himself talking about index nerds know what they tried to do was to create a class of shares or move their votes into their pref class. And ultimately, they never got added until the rule changed recently on multi votes.

But even more recently, I think today, or maybe it was last night, here's what Peloton CEO said-- sorry, Palantir's CEO said. They had good earnings. They had positive earnings. This was his quote. Quote, "With these results, our company is now eligible for S&P 500."

These are the comments being made by CEOs after they report quarterly earnings. It is all issuers are talking about now, is getting in the S&P 500. And S&P stats, I believe, are 18% of assets in the US or benchmarked to the S&P 500. Do you worry about the S&P 500 getting too big and, quote, "even too important?"

LOUIS BELLUCCI: Great question, and very interesting quotes, I think, to highlight. Yeah, it's a very, very relevant benchmark. We're talking about the benchmark for the largest and most liquid market in the world. And the assets behind it, obviously, are significant.

Do I worry it is too large or too significant, too important? No, and that answer probably won't surprise you, but I'll give you a couple of reasons why. And I think you can look at this in a couple of ways, right?

You can look at it from the moment of addition or removal from the S&P 500 and the significance of that. There's a lot, a lot of research and papers and literature on these things commonly known as the index effect. The most recent one, I think, came out in June, came out of some faculty in Harvard, focusing on the index effect.

And they broke it down by abnormal return for index additions throughout the decades. And they looked at it from 1980s, 1990s, onwards. And I think they pointed out that in the '80s, there was an abnormal return of 3% for additions to the S&P 500. In the '90s, that went up to 7.6%, I believe, is the number. 7.6%-- that's a significant, major number.

The most recent decade, that number is down to 0.8, so almost nothing. So that potential inefficiency of the market now is quite efficient, right? The additions and removals of companies from the S&P 500 is very, very efficient from that metric, at least. So from that standpoint, yes, it's a significant moment, I think, for a company to be added or removed, but as far as a hazard to the market, no, I don't think that there's anything there.

You could also look at this from a passive investing standpoint of ongoing inclusion in the S&P 500 or any index. There's passive assets that are buy and hold. And there's a lot of talk out there, I think, in the markets about how inclusion or the growth of passive indices could potentially create inefficiencies, harm price discovery, and so on.

So there are indicators that you can look at, and some of this research points to things like just the overall decline in liquidity, correlations amongst index constituents, even the impact on spreads. But the reality is that, as I said before, it's the largest, most liquid index market in the world. Volumes and market liquidity are plenty healthy. I don't think that there's anything to be alarmed of at this point in time.

PETER HAYNES: I promise you, Ricardo, I'm going to get to you here, OK?

RICARDO MANRIQUE: No, all good.

PETER HAYNES: I don't want you to feel like you're in the middle of the sandwich here. OK, Lou, just before I ask Ricardo about multi votes, would you say that the volume-- I'm keeping this question very carefully worded because I don't want to ask you something I know you can't answer, so I'll ask it generally. Is the volume of enquiries from large-cap issuers around the world higher today than it would have been five years ago? That question is, how do I get in the 500? What do I need to do with my corporate structure coming in to you, the index committee?

LOUIS BELLUCCI: It's a really good question, and hopefully this is an encouraging answer, but I actually don't know, and that's intentional. I'm an analytical employee. I sit on index committees, and I make decisions about inclusions or exclusions from indices. Those type of inquiries--

PETER HAYNES: They get walled off.

LOUIS BELLUCCI: --are routed through different team, and they are walled off from me. So those quotes that you cited before, it's one of the first times other than reading the questions of me hearing it.

PETER HAYNES: Drives me crazy when I read it, that's all. I just feel like issuers are spending too much time of their life trying to get in the S&P 500. I know you're the gatekeeper of that very important benchmark, and S&P does a very good job with that. Ricardo, let's move on--

RICARDO MANRIQUE: Can I just chime in on this real quick, though?

PETER HAYNES: Yeah, for sure.

RICARDO MANRIQUE: Yeah, they're really interesting questions. And I was thinking, as you guys were discussing, if you unpack it a little bit, you kind of get to some of the fundamental questions and challenges, I think, which have to do with, for example, in the discussion around the TSX index and Toronto, I mean, a lot of that boils down to market infrastructure, regulatory practices. So I think companies decide to list based on access to capital, based on regulatory oversight, in some cases, regulatory burden. They may decide to incorporate in certain places based on historical connection or, in some case, maybe tax and tax legislation.

Those are all fundamental dynamics around economics and capital markets and regulations that drive those decisions. I think the important thing to consider is that for us as index providers, our job is to be a reflection in the lens on what the investment opportunity set is, but that investment opportunity set kind of arises based on a lot of these factors which we're not involved in, we don't have control over. And similar, I was thinking about similar for inclusion in the S&P 500, that, to me, is a function of the growth of passive investing and the dynamics between the cost and value add of active versus passive. That is necessarily a function of S&P being an index provider, or anyone else, Russell 2000 or MSCI.

I think sometimes I get a sense that maybe folks don't understand the index providers. It's not our job to set the direction of markets and trends and investors. We're effectively a reflection of what those trends are. And ultimately, we work with asset owners, asset managers, banks, hedge funds. If we're going in a direction that doesn't follow their capital allocation process, they go off and do something else. I just wanted to-- I thought it was worthwhile.

PETER HAYNES: Yeah, there's one comment I want to pick up on in what you just said there in terms of where companies are going, access to capital. They see that 18% of their shares-- as Stephen Schwarzman said, now we have people own us who don't even like us. They just want that base index ownership.

RICARDO MANRIQUE: I would argue that's a function of the rise of passive investing.

PETER HAYNES: Yeah, and being concentrated in the large 500 names, and that's a concern.

RICARDO MANRIQUE: Yeah. Obviously, there's indexes that play a role in that, but I still think if you unpack that, if you look at the numbers coming out of, I don't know, the Investment Company Institute, if you look at active versus passive, it's basically like, an x, right. If you've got passive rising and active declining, that's kind of really the underlying--

PETER HAYNES: I am in the category of hoping we mean revert on that at some point. I do worry about too much indexing does take away some of the efficiencies in the market with less investors out there looking to figure out what companies are worth, with everyone moving be together. So I do worry about those trends. But an interesting topic where the tree index providers on stage here have all kind of gone in different directions mostly coalesced in the end is around multi voting shares.

So let's go back to Snap's IPO, I think it was in 2017, which was the first US IPO where there were zero votes in the class share that was being listed. That created a snap amongst the institutional community at a time when governance and other matters were at the forefront around ESG. So S&P-- I think you might have been the first to move, Lou. You guys chose to no longer allow those names to be eligible including, Snap, for the 500, even if they were profitable.

Raman's organization came out with a consultation paper right away, and one of the suggestions you made was we're going to weight stocks based on their votes. That was one of them. And then FTSE had a unique approach to things, which was we're only going to allow companies into our benchmarks if a certain percentage of the shares that are in the index have votes, and you set the hurdle at 5%.

Fast forward, and you said any company in the index five years later, if you don't give 5% of the votes to the class that's in the index, you're going to get booted, and anyone else that comes along that doesn't have that doesn't get added. So we literally went a five-year period where S&P was not allowing these names in the index. MSCI did another consultation and ultimately decided after a few years not to change anything.

And then S&P last year did a consultation, decided to change the rule, and now they're allowing these multi voting names like Blackstone in the benchmark. Was Lulu a multi voting? I can't remember. I think they were, yeah.

And yet, FTSE stayed with the 5% rule, and lo and behold, last September, all these names started getting booted out of the index. And then in June, Russell had a bunch of names coming out. Why, in the end, did FTSE not back off that policy? Because the industry's feelings changed on this too.

We need an opportunity set as broad as possible. That's why they were barking at Lou and at Raman. Why did FTSE stay with the 5% rule?

RICARDO MANRIQUE: Yeah. No, it's a good question. Honestly, I think it kind of ties back to maybe the point I was trying to get at earlier.

So when this happened, which I think you mentioned, it was 2017, and the Snap IPO was the trigger for this. Pre my time at FTSE Russell, but I believe they did the consultation, they landed on this 5% rule, which I believe is only applied for companies in developed markets. That was driven by both the results of the consultation that they did at that point in time. I think the five-year grandfathering window was meant to minimize disruption in the index portfolios over the course of time, but it was driven by both the feedback on the consultation, and then also within FTSE, we run various sort of advisory committees where we speak to market participants and clients, both on the buy side and sell side.

And yeah, again, I think the way we've handled that in the way that we think about the construction of index portfolios is, to a large part, if not all, a reflection of A, the feedback that we get from the market generally, and B, specifically the feedback that we get from the various external advisory committees that we engage with. And yeah, as far as I know, everyone that we speak with has kind of still been supported.

PETER HAYNES: OK, so people didn't yell at you and they all of a sudden had to make a bunch of changes last September or even at the June rebalance on the Russell. Because people woke up to the fact that all of a sudden, this is an issue, and the portfolios have to change.

RICARDO MANRIQUE: Yeah. I mean, with any methodology changes, as these guys can probably attest to, you're never ever going to have 100% of the people on the same side. Some of that may boil down to just fundamentally differing points of view. Frankly, some of it sometimes boils down to economic points of view.

But generally speaking, I think the way the FTSE handled it-- again, prior to my time, but I kind of inherited it-- seems to have worked well. And I think the grandfathering and the way that it was managed-- and also, again, it's only applicable, I believe, to developed markets, not emerging markets. I think generally, the majority of the feedback and the majority of support was positive and still remains there. But again, you're never going to have 100.

PETER HAYNES: You've mentioned developed versus emerging. Is there a significant percentage of the emerging market companies that have 0 votes? Is it a bigger issue there than it is? I don't know the answer.

RICARDO MANRIQUE: I don't know the answer. I don't know the stats off the top of my head. I suspect--

PETER HAYNES: Could be.

LOUIS BELLUCCI: Yeah. I'd have to go back and look. I'd suspect that if it was a major issue, we would have gotten the feedback.

PETER HAYNES: So we're on emerging here. Let's talk about a very important emerging issue, Raman, and that is China. So to level set for the audience, class of shares that's currently not in the index representing Chinese companies at full weight is known as A shares, onshore shares. And a few years ago, we went through some consultations and ultimately decided to add a portion of those shares. FTSE went to 25% of the float in their benchmarks eventually, and MSCI is staying at 20%, or it was at 20%.

You got to 20%, and you told the industry there's some things that are going to need to change in order for that number to go higher. Can you just update the audience on what those issues are? And what is the status of those issues such that it could at least pave the way, whether you did or didn't, to hire Chinese weighting in emerging benchmarks?

RAMAN SUBRAMANIAN: Thanks, Peter. So we didn't say that. The investors told us what to do. So--

PETER HAYNES: Well, the issue's for investors--

RAMAN SUBRAMANIAN: Yeah, investor's issue. So you're right that we started in 2018 with 5% inclusion. In 2019, we increased that to 20%, included both large- and mid-cap, only stocks from the Stock Connect program. And investors said there are four major issues still there. Until they are fully resolved, don't increase the weight again. And one is if you think about the world over the settlement cycles is either T plus 1 or T plus 2. China has T plus 0, so that's a major issue if you're managing money from here and trying to send, and you're kind of pre-funding the whole thing.

The three other issues were on-- so right now, most of the stock that we have included is through the Stock Connect program. The trading holidays between the Hong Kong Exchange and the pipe into the mainland are not synchronized. So that's another area of friction which comes in.

The omnibus account-- so if you are a broker trying to send this trade together, you want to hide out the identity of the underlying, so that is still not very clear in the Stock Connect. And the final one is that there are still not complete derivatives and hedging instruments available. Now, investors have said that fantastic progress was made in the last four years. And if you go back, they're trying to synchronize their trading holiday, there's a workaround, the omnibus thing, but still there's a friction.

So if you want to increase the weight from 20% to 100%, that means the weight of China A shares within MSCI China will become 40% of the benchmark. Today, it's about 15% to 16%. That is a sizable amount of money which needs to come into the market in terms of if allocation-wise. And if you don't have a mechanism to control the friction, it's going to be challenging for investors.

So they are waiting for the complete resolution. They are talking to the regulators out there, and we become more of a gathering the feedback and making sure that the feedbacks are heard by both the regulators and investors.

PETER HAYNES: I think that the pressure will come if we were to see a thawing of relations between the United States and China, and all of a sudden, we saw the Chinese market rip. Then all of a sudden, people would be probably back to those index providers saying, we want more China exposure. Plus we haven't even discussed how often are people coming to you and asking you for moving China into what we'll call standalone status?

RAMAN SUBRAMANIAN: So a lot of investors today run a standalone China because of the weight of China within the emerging market index. So all of them have started to think about emerging market ex-China benchmark. So, similar to the going back to the concentration issue that we raised before, Peter, many clients who think that if China is 30%, 40% of the benchmark, shouldn't I manage that separately from the emerging market exit? So irrespective of the fact whether it's a geopolitics or non-geopolitics, because of the concentration of China within the benchmark, those discussion started way before the geopolitics played in.

PETER HAYNES: So while I have you just on emerging, you and the gentleman beside you were split on another country called South Korea. South Korea is a developed country in the FTSE benchmark. It's not developed in MSCI. What would it take for South Korea to move from emerging to developed?

RAMAN SUBRAMANIAN: So, similar to that, similar to China, they have issues around currency. So right now, there's a no-onshore currency-- there is no-offshore currency market for the Korean won. That's a big issue. Again, it leads to pre-funding kind of a thing.

Then they also have issues around the omnibus and in-kind transfer of shares. These are all market friction events. So earlier this year, we saw Korean authorities coming with some reforms. So we have put out a note saying that, OK, these reforms have been announced. They need to be put in practice, and the investors have to experience it. Once the investor experience it, and they give us the feedback, potentially, then, we'll be back to the consultation to decide whether it should be upgraded to developed market or not.

PETER HAYNES: OK, so I want, with the time we have remaining, to focus on extreme price movements in securities that are in benchmarks. So I'm going to start with you, Lou. I want to make sure I get my words right here. Index inclusion-- obviously, we know S&P 500. I've been harping on that being an important issue.

Last week, I received a phone call from a participant that felt like-- I'll be clear-- felt like there was an insider that understood that Lululemon was going to be added to the S&P 500, and the logic for that was that Lululemon, on the day of the announcement, before it was announced, outperformed all of the other names that were candidates for the benchmark that could have been the decision your firm ultimately made. Now, I answered this inquiry by saying there isn't a chance that anyone outside of S&P would have known this. There isn't an inside source of information or a service you can be provided where you know Lululemon is going in and others aren't. That's my perception of things.

And I know you get this question a lot, Lou. For the audience's benefit, can you just confirm that nobody knew Lululemon was going into the index before it was announced?

LOUIS BELLUCCI: Yeah, there is no early information. There is no fast track. When we put out a press release, that is the first time that anyone in the market becomes aware of S&P 500 or any index constituent changes. It's a matter of confidentiality, of trust with index providers, and S&P DJI takes that very, very seriously. It's our brand. The integrity and quality of our benchmarks as an independent benchmark provider is so crucial to our position, and I think my counterpart here, as well's, position within the market, within the industry and the use of our indices.

So S&P DJI has a really extensive, robust framework around protecting the integrity and quality of our benchmarks. We call it a governance framework. It involves audits and compliance monitoring of things like e-communication, policies and procedures, including a policy around confidentiality, conflicts of interest, and firewalls. I'll save you some of the details of those things, but every staff member is trained on those policies. Again, they're monitored on a regular basis around those. And their systems and controls and whatnot in place, as well, is separation that we mentioned before between commercial and analytical.

PETER HAYNES: I think it's a good idea that you don't let anyone speak to you, because you would think the issuers would constantly be lobbying and wanting to speak to you and expecting you to tell them-- that was a question we get often from issuers, as well, we'll get a phone call when we're going-- no, you won't get a phone call and you're going in the index. No one is going to find that out.

So let me switch over to China for a second. Raman, security that anyone can punch onto their Bloomberg by the symbol 1942.HK equity. If you were to put that into your Bloomberg, you would come up with a company called MOG Digitech, which is a Chinese company that really caused some noise for MSCI back at the August rebalance.

I'm going to give you guys a little bit of the background on MOG. It rallied from 40 to 100, and it qualified for MSCI edition as a result of that. Some of the clients of MSCI reached out and suggested that there had been some manipulation. And ultimately, MSCI decided not to include this name. There is an extreme price rule for MSCI. This name, it appears as though, was not in that category, but it was not included in the index.

So when that announcement came out on August 11, when MOG would have otherwise qualified or been announced, the stock went from 90 to 63. But then strangely, it rallied back to 100 by the end of the month. Just before the end of August, the stock sold off from 95 to 40 when local regulators announced that they'd made an arrest into a scheme to manipulate the MSCI index inclusion. That stock now trades at $2.11, and I feel like I'm reading a Ben Mezrich novel where he talks about somebody figuring out the NICA is going to change its policies.

So indexers felt like this was a classic case of an attempted pump and dump by the hedge funds, who were manipulating and gaming the index inclusion process. The dump almost became the indexers, but you guys didn't let that happen. What does your postmortem show you about that event? What have your clients told you about that event? And what rules might change or be consulted on as a result of that extreme price move and potential manipulation of index inclusion?

RAMAN SUBRAMANIAN: Yeah. It's a great question, and we have seen this happening, especially in that part of the world where we have seen these kind of price manipulations in the past. So what we did was we had this extreme price movement, which goes up to kind of 400% increase in price over a period of rebalancing. And we monitor about five days to about 60 days, and that's the rule.

And this is relative performance. It's not just individual absolute performance. It's related to the country sector index where the stock is there.

Now, what we saw was that for this particular case, I'm part of the index committee, when it came to us, we were surprised that you could clearly see somebody's trying to manipulate our rule book itself. Because it had a 3,000% increase, and clearly somebody who understood the rule was trying to manipulate. Simultaneously, we started getting feedback from our clients saying, oh, it looks like this is manipulated.

Technically, it's not the rule of index provider. We take the market data to build index. But we are trying to put enough buffers and protection for the ultimate investor.

And if you go by the rule, book we thought this should be in, but something smelled fishy, because this company also changed. They used to be a eyeglass frame manufacturer. They become suddenly a fintech company in May of 2023. So all the signs were pointing that there is something really fishy going on.

So we put an exceptional note saying that we are not going to include them, and come back and see that whether the rules that we have are right rules to be there or people are able to manipulate. At the end of the day, exchanges have to do and control this kind of price manipulation. Index provider-- we go, and if somebody is manipulating a stock, which is in S&P 500, going back to Lululemon we talked about, we have no control on that. It's New York Stock Exchange or Hong Kong Stock Exchange. They have to control it.

We have to just take the price, but we'll ensure that the index cannot get manipulated. That's why the committees and rules are there.

PETER HAYNES: I don't think this is the last time we're going to talk about this type of activity, because there's just so much money chasing these index events. And part of the reason I think some of those stats have dampened that you talked about market impact around index changes is because there are more eyeballs on these changes, there's more capital that's flowing around them and smoothing out those events. So I'm not surprised that something like that happened, sadly, but I would expect that that's not the last time we'll see that.

Just before we finish, are there any questions in the audience, Ben? Anyone online? Anyone have any questions? In the middle, if we can just grab a microphone here.

IVAN: I'll shout.

PETER HAYNES: No, I just want to get it on the playback. They won't hear you. Is this a quick one, Ivan? Perfect. Are you going to ask Lou the next name on the S&P 500?

IVAN: So I tend to agree with Raman in terms of the price manipulations that we've observed around index inclusions. We also have noticed an increase in activity on that front, and I agree that it's not the responsibility of the index providers to enforce. Maybe they can play a part in dampening or making it more difficult to have a manipulative effect.

So my question is to FTSE, then, where S&P and MSCI have adopted a sort of hybrid ranking model where S&P uses a VWAP, for example, in Canada to determine eligibility, and MSCI has a randomized 10-day ranking period. For a number of FTSE's flagship indices, including Russell, it's a single point in time ranking, which is widely disseminated and widely known. And particularly around some of these smaller, less liquid companies, it doesn't take a whole lot of capital to move a stock, and we've seen a substantial number of names move in the absence of any news on a ranking date. 10%, 20% is not unusual for some of these companies.

I'm just wondering if that's something that you've looked at changing? And I'd also be curious as to why that isn't something that's already been implemented, given the global standard in place at some of the other providers?

RICARDO MANRIQUE: Yeah. Difficult for me to comment, I guess, on specific points around methodology. What I would say is generally speaking, methodologies, indexes, index portfolios, they all evolve over time. I think we're generally led by the feedback that we get from market participants and also our advisory committees. To the extent that this or anything else becomes an issue, it's certainly something that FTSE looks at and will look at. And obviously, we typically do that through a consultation.

So for example, this aside, the big thing we've been looking at is the rebalancing frequency, which is we're running a consultation right now, because that's--

PETER HAYNES: On Russell, just to be clear.

RICARDO MANRIQUE: Yeah, on Russell. Yeah. So of everything that at least I'm aware of, the rebalance frequency on Russell has been kind of top of mind from market participants, which has led to the consultation that we launched, I think, maybe a month ago or so, which I think runs through November. That's kind of been, first and foremost, the biggest piece of feedback that we've gotten from market participants, is to really think about do we want to continue with the annual rebalance, which some market participants don't mind it. Others have said that it just creates a really significant level of activity leading into and on that specific day. So I'd say that's kind of, first and foremost, the immediate focus.

PETER HAYNES: Well, one thing you guys all do very well is consult, and we get a lot of them. It's hard to keep track of them, and you have to parse them. In fact, I think you're winning, Raman. I think MSCI consults the most. I feel like I'm reading one every day.

Gentlemen, thank you very much. There was lots of material to get to, which we didn't cover off, but we'll have you back next year on one of those issues, I'm sure, including whether or not we remain float-weighted. That was a question I wanted to ask Lou, but maybe we'll get to that one down the road as S&P has been musing about maybe going away from float and moving to just volume-based, liquidity-based benchmarks.

So it's something to think about. Don't just dismiss it out, of course, because it's an interesting thought. But regardless, thank you, gentlemen, for your time, and we'll move on to the next ETF panel. Thank you.

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