MSCI Announces Results of the MSCI 2024 Market Classification Review
MSCI announced the results of its 2024 Market Classification Review, highlighting several key market updates and potential reclassifications.
A consultation is underway regarding Bulgaria's potential reclassification from Standalone to Frontier Market status, with feedback welcomed until April 15, 2025. MSCI noted various improvements and remaining challenges in the Korean equity market, including recent short selling bans and updates to the FX market and LEI system.
Significant liquidity improvements were recognized in the Egyptian FX market, reducing repatriation challenges for investors. However, MSCI warned that future liquidity issues could lead to reclassification consultations.
Concerns were raised about market accessibility in Bangladesh due to ongoing floor prices and FX liquidity issues. Lastly, MSCI addressed the global shift towards shorter equity settlement cycles, with several markets moving to T+1 cycles and others in the review phase.
- Liquidity improvements in the Egyptian FX market easing repatriation challenges.
- Consultation on reclassifying Bulgaria to Frontier Market status indicating potential growth.
- Short selling ban in Korea introducing market accessibility restrictions.
- Low liquidity and floor prices in Bangladesh affecting market accessibility.
Insights
MSCI's 2024 Market Classification Review brings several noteworthy updates relevant to retail investors. Firstly, the potential reclassification of Bulgaria back to Frontier Market status is significant. This reclassification, if it happens, could make Bulgarian equities more accessible and attractive to international investors, potentially driving up their prices as they are included in broader market indices.
For Korea, while certain reforms have improved market accessibility, the recent short selling ban complicates the landscape. Short selling bans can reduce market liquidity and increase price volatility, which may deter foreign investors. The announced measures to enhance FX market structure and the introduction of Legal Entity Identifiers are positive steps but need thorough implementation to yield benefits.
Improved liquidity in the Egyptian FX market alleviates some recent constraints, but investors should remain cautious. MSCI’s warning about potential reclassification if liquidity issues reoccur underscores the ongoing risk associated with the Egyptian market.
The trend towards shorter settlement cycles, with several markets adopting T+1 cycles, aims to reduce counterparty risk and increase market efficiency. However, the operational adjustments required may pose challenges and the lack of global alignment might complicate cross-border transactions.
Overall, these updates present a mix of opportunities and risks. Investors should monitor these markets closely and consider how these changes may impact their portfolio.
The consultation on Bulgaria’s reclassification could indicate a renewed interest in its market. Frontier Markets often attract investment due to their growth potential, despite higher risks. If reclassified, Bulgaria could see increased inflows, which might support economic growth and market stability, benefiting long-term investors.
Korea's situation is mixed. The introduction of English disclosures and FX market improvements align with global standards but the short selling ban introduces uncertainty. Investors should consider the potential for increased volatility. The partial adoption of Legal Entity Identifiers, while a positive step, highlights the need for ongoing regulatory alignment to truly enhance market accessibility.
For Egypt, the recent improvements in FX liquidity are promising. However, the Central Bank’s commitment to a more flexible exchange rate system will be critical. Investors should watch for signs of renewed liquidity constraints, as these could trigger another market review and potential reclassification.
Shorter settlement cycles, such as the move to T+1, enhance operational efficiency and reduce risk. However, the lack of a unified settlement cycle globally remains a challenge for investors managing international portfolios. The operational readiness of markets and investors alike will be important to fully realize these benefits without introducing new risks.
These developments emphasize the importance of regulatory stability and the adaptability of market infrastructures. Retail investors should stay informed of these regulatory changes as they can have significant implications for market accessibility and investment strategies.
Select highlights of this year’s review includes MSCI:
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Launching a consultation on the potential reclassification of
Bulgaria from Standalone to Frontier Market status - Continuing to monitor the implementation of measures aimed at improving the accessibility of the Korean equity market for international investors, but also noting that the recent short selling ban introduces market accessibility restrictions
- Noting recent improvement in the liquidity of the Egyptian foreign exchange market while warning on the potential implications of deteriorations reoccurring
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Continuing to monitor the market accessibility of the
Bangladesh equity market - Highlighting the evolution of clearing and settlement cycles across global markets
“In the face of market volatility, regulators in certain markets around the world have proactively advocated for elevated market accessibility standards. While we are seeing various developments and measures announced and implemented, it’s crucial that any actions toward enhancing market accessibility align with investor expectations and that no new restrictions impede any forward momentum,” said Dr. Dimitris Melas, Global Head of Index Research and Product Development and Chairman of the MSCI Index Policy Committee. “We will continue to evaluate how new and evolving reforms impact global institutional investors’ market accessibility and assess their effectiveness throughout the next market review cycle.”
More information related to the MSCI 2024 Market Classification Review, including the results of the 2024 MSCI Global Market Accessibility Review, can be viewed at www.msci.com/market-classification.
Consultation on potential reclassification of
MSCI announced today the launch of a consultation on a proposal for potential reclassification of
As part of MSCI’s August 2016 Index Review,
MSCI welcomes feedback from market participants on this reclassification proposal until April 15, 2025 and will announce its decision as part of the MSCI 2025 Market Classification Review.
Korea’s Market Accessibility
From 2008 to 2014, MSCI consulted with global market participants on the potential reclassification of
MSCI recognizes and welcomes the recently proposed measures aimed at improving the accessibility of the Korean equity market.
- Foreign exchange market: In February 2023, improvements to the Korean foreign exchange (FX) market’s structure were announced by the Ministry of Economy and Finance (MOEF). Starting from January 2024, Registered Foreign Institutions (RFIs) are now able to participate in the onshore interbank FX market and engage in direct FX transactions with banks. The pilot operation to extend trading hours has also been initiated, with full implementation set for the latter half of this year. Additional time is required to assess the implementation of these measures and the extent to which these infrastructure improvements align the Korean FX market with global standards.
- Legal Entity Identifiers: Advancements to the capital market were announced by the Financial Services Commission (FSC) in January 2023. By the end of that year, following appropriate regulatory modifications and the development of relevant IT infrastructure, corporations began using Legal Entity Identifiers (LEI) instead of the Investor Registration Certificate (IRC) system. The requirements for reporting investment details of each final investor associated with an omnibus account holder were relaxed, and the scope of OTC transactions for ex-post reporting was broadened. However, market participants have expressed concerns about the complexity of the requirements needed to obtain an entirely validated LEI, which is creating further obstacles rather than simplifying market access for foreign investors. MSCI will continue to closely monitor the implementation of these reforms.
- Mandatory disclosures: As part of the improvement measures announced by the FSC, the first phase of the mandatory English disclosures (phased in by asset size and foreign ownership percentage) started this year. In addition, updates to dividend distribution procedures, announced by FSC and MOEF last year, were implemented in 2024. Nonetheless, only a minority of companies have embraced these measures.
It is important to note that the aforementioned reforms do not address the issues arising from the limitations imposed by the local stock exchange on the use of exchange data for financial product creation. Additionally, in November 2023, authorities enacted a full ban on short selling, introducing additional accessibility constraints.
In response to COVID-19,
As a reminder, potential reclassifications require that all issues have been addressed, reforms have been fully implemented, and market participants have had ample time to thoroughly evaluate the effectiveness of the changes.
Improvement in the liquidity of the Egyptian Foreign Exchange Markets
Due to low FX liquidity and the re-emergence of the FX queue, foreign investors encountered repatriation challenges in the Egyptian equity market in 2023. In May 2023, MSCI applied a special treatment for
“Significant frictions in the capital repatriation process negatively impacting index replicability are considered an uncharacteristic feature within Emerging Markets,” remarked Jean-Maurice Ladure, Global Head of Index Management Research and member of the MSCI Index Policy Committee. “If Egypt were to re-encounter similar FX liquidity constraints in the near future, MSCI could consider launching an off-cycle consultation on a reclassification proposal for
MSCI welcomes the aforementioned positive developments and will continue to closely monitor the onshore USD liquidity levels and the capacity of foreign investors to repatriate their capital without delays from the Egyptian market.
Market Accessibility issues in
In July 2022, the Bangladesh Securities and Exchange Commission (BSEC) reinstituted floor prices for all listed securities. Since then, the BSEC has gradually lifted these restrictions, yet six listed securities still retain floor prices. In addition, market participants have recently reported delays in capital repatriation due to low liquidity in the onshore FX market.
As a result of these market accessibility issues, MSCI will continue to apply the special treatment introduced in February 2023. This special treatment defers index review changes and the implementation of corporate events aiming to reduce the number of potential changes in the MSCI Bangladesh Indexes and mitigate concerns on index replicability.
MSCI continues to welcome feedback on the accessibility of the
Evolution in Settlement Cycles of Global Equities
The path towards shorter cycles in equity clearing and settlement mechanisms has continued. In May 2024,
In response to these developments, MSCI sought feedback from global market participants from December 21, 2023 to March 15, 2024 on the potential impact of these changes in their investment processes. Market participants agreed that while operational adjustments are necessary due to these changes, amendments from index providers are not required. Furthermore, there is an expectation among market participants that the trend towards shorter settlement cycles will continue, ultimately establishing T+1 as the new standard. Feedback received also reemphasized that shorter settlement cycles must not introduce further operational challenges and risk, such as pre-funding requirements. Simultaneously, it was underscored that a lack of alignment in equity settlement cycles across global markets is undesirable.
MSCI continues to closely monitor these developments.
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FAQ
What is the potential reclassification of Bulgaria in MSCI's 2024 review?
How has the short selling ban affected Korea's market accessibility?
What improvements were noted in the Egyptian FX market?
What ongoing issues are affecting Bangladesh's market accessibility?
Which markets have moved to T+1 settlement cycles as per MSCI's 2024 review?
