Index Concentration, Domicile Debates and Global Benchmarks

Peter Haynes:
Welcome to a special edition of Bid Out, a TD Securities podcast focused on market structure. I'm your host, Peter Haynes, and in this episode we take a peek inside the 26th annual TD Securities portfolio management and market structure conference to a panel discussion involving executives from the three largest benchmark providers in the world, MSCI, FTSE Russell, and S&P Dow Jones, along with an index manager from State Street Investment Management. The four index benchmark experts tackle important issues including the increasing difficulty matching companies to domestic indices, the split status of South Korea and soon Vietnam, concentration concerns for large cap tech names, and the emerging index issue of eligibility and classification of digital asset treasury companies. We hope you enjoy this deep dive into index benchmark issues coming at you right now.
We got a lot of material to cover here on the next session. A panel that we've had I think almost every year of this conference and that is to bring together the index providers to talk about major issues that are impacting the global index landscape. Last year we added one feature to that and we brought in a buy-sider, an index user, and Mike Perry from Vanguard. This year we have brought Emiliano Rabinovich to my far left from State Street, one of the index portfolio managers at State Street who has an interesting tie to Canada given that you lived in Montreal for years before moving to Boston. So really pleased to have you join us today, Emiliano. It'll be fun to get your perspectives. I like to say you're going to keep these three honest what the actual money is saying. Beside Emiliano is Louis Bellucci who is involved in the index business for Standard & Poor's, runs their committee meetings, an influential decision maker behind the curtain, as I like to say on S&P index events.
He will not be telling us the next name to go in the index, but maybe what he can tell us is some of the decision making that goes on behind the scenes at the index provider to help us all have a better sense of what goes on behind the curtain. To Lou's immediate right is Jean-Maurice, I call you JM. So Jean-Maurice Ladure from MSCI who's a managing director and the head of index management. JM was with us last year. I appreciate you joining us again this year to provide some of the MSCI perspectives. And then between me and JM is Arne Noack who's joined FTSE Russell recently, has experience on the index management side and on the ETF user side or index user side. He is head of equities for the America's four FTSE Russells. So we'll get right into it. Louis, and I'm going to start with you.
It's a theme that's generated a lot of discussion in index circles. Actually I would say this issue is nonstop every day coming up in what we do. And that is the disconnect, the growing disconnect between your responsibilities as an index manager to domestic benchmarks and your responsibility as an index manager to global benchmarks. And they're not one and the same. And the reason is because local constituencies believe companies belong in their market and companies have figured out that if they can be in more than one market, it helps them get more indexed assets. So the fact that it's become harder and harder to, as we move global, decide where you put companies in terms of what country they're given in, I'm interested to know, you run the domestic benchmarks in three of the G-7 countries. Are you expecting that increased index overlap amongst various domestic benchmarks is inevitable?
Louis Bellucci:
Thanks for the question. Yeah, it's true. Globalization, global economy puts pressure on the traditional definitions of a country index, a country benchmark. Most companies nowadays operate beyond and are influenced by factors outside of their geographical borders. I think that's especially true for large caps that are inherently multinational. And those are the types of companies that the indices you're mentioning are including. It's more apparent for certain markets. I think for Canada especially given its adjacency to the US, it's more visible and certainly more, like you said, it's something that seems to be happening every day, something discussed every day. That makes it increasingly difficult for index providers like us to provide clear country benchmarks that are distinguishable from one another. To answer your question, no, I don't think it's inevitable. Not as a whole sense. I think on the edges, yes, and we're seeing that already.
If you think about it and you look across index providers, we all have our own way in which we define country and domicile and so on. So that overlap already exists across index providers. That's also true for size classifications. That's true for developed and emerging. That's true for style, growth and value. Understand your index methodology. If there's one point you're going to take from me, it should be that. Pulling this back into S&P, S&P has been discussing what distinguishes a domestic benchmark to a global benchmark in terms of are there differences or nuances to the use cases for them. And I think in those terms, it's probable or more likely that methodology changes happened to certain indices as opposed to as a whole or across the board. In fact, S&P recently made changes to the S&P TSX indices that allows for companies that are not S&P domiciled as Canada to still be included in the Canadian benchmarks if at least they are incorporated in Canada.
For the S&P 500, I think it's a lot less likely. There's some reasons for that. It's more of a global benchmark as we talk about the differences between global and a domestic benchmark. The observable trend is that companies are redomiciling to the US. It's already a very deep market, but there's no risk of hollowing out of that market that could raise concerns or demand for changes to the methodology in that sense. And also there's other options, right? There are other options that define country a different way or exposure to those countries in other ways that I think are available for those that are interested in it.
Peter Haynes:
As you're talking there, and I'm thinking about just even the last couple of days, so one of the topics that's been of interest, it was brought up at your Canadian advisory meeting. By the way, those advisory meetings are not embargoed in terms of just who said what they don't say, but the topics you guys want everyone to know. And one of the topics was the treatment of Teck and Anglo American. I know you're not going to speak about a specific deal, so the question I'm going to ask you about is more philosophical and more process oriented. There's a school of thought in Canada that that merger with the management team being fully located in Vancouver and with the companies both being global mining companies, both arguably being justifiably in either the Canadian or the London benchmarks, there's an argument to be made that just because they're incorporated in London, it's an important name in the Canadian market and it should stay there.
And so that's the argument that's being made. And even in the last two days, we've had two more Canadian names disappear through US mergers. COOR took over New Gold and an old Canadian name, Ovintiv, former in Canada is taking over New Vista. This is complicating this discussion, so I say it's happening every day. What goes on behind the scenes and how do you listen to your users with respect to those one-off edge cases you talked about? And maybe why aren't you thinking that there's a possibility that more Canadian names would potentially be eligible for the S&P 500 hundred? And if that was to happen, how would that happen?
Louis Bellucci:
Yeah, I think first is the change I mentioned on the S&P-TSX. I mean that's a bit of a one-way overlap allowing, right? It's allowing for companies in the S&P 500 to also be included, but not the reverse.
Peter Haynes:
A lot of people thought the reverse automatically applied, just so you know.
Louis Bellucci:
Right.
Peter Haynes:
We didn't, but others did.
Louis Bellucci:
That's why I wanted to make that point for sure. Yeah, I mean, what are we talking about here? We're talking about how do we take into account feedback and how does that drive through into the decision-making process? Feedback is critically important. I highly, highly value it. Everyone should provide feedback when they have an opinion. The feedback loops that we have in place, very, very valuable. Feedback can inform the index committee on the approach to a unique corporate action like the Anglo-Teck merger that you mentioned. Of course, I'm not going to comment on that specifically. Or it can steer the committee towards what aspects of an index methodology perhaps should evolve or change. Any feedback we receive, including that on a specific event is always thought of in terms of or in context of the index methodology. What is the objective? What are the rules, right?
And that's a really important point. I think you said it in your question is that the rules could preclude that company from continued inclusion in the Canadian indices. So that's how we're going to look at it. We're going to look at it from a rules perspective. And whenever we consider changing a methodology rule, we go through a consultation process. That consultation, sure, some feedback may have been received already, but the consultation allows for literally anyone to provide input and a chance to be heard, their opinion to be heard and involved in the decision-making process in that way.
The policy is very clear that the index committee has the final decision-making authority when it comes to that, but they're going to look at the feedback that's received against other analysis that they have. All of these factors are in play to come up with a final decision on whether or not a rule change should be made. So I think a point I want to make on this is that index providers operate in a rules-based construct, right? Follow the rules. But markets are a dynamic, we need to be adaptable and feedback is a vital, vital part of that adaptability. So the feedback on these future events is taken with full weight.
Peter Haynes:
I will front run next week's S&P US Advisory Meeting, which I'll attend to say that I will raise as an item the continued question that comes from Canadian issuers about why they're not eligible for the S&P 500 with all the other things that are happening around there. So that's a topic that I'm just reflecting the views of the industry. And on that note, Arne, in terms of companies wanting to get broader exposure in the US, a lot of them are taking steps to become eligible for US indices. We've seen that impact Russell. In the case of your index, you guys were very, very quick to plug a hole that was created or recognized where issuers were simply slapping on that they were headquartered in both Canada and the US and thinking that that would allow them to be eligible for the Russell US indices. And based on the rules, it was unclear.
So you guys clarified that by saying, "If you have headquarters in both jurisdictions, then you are only going to be eligible for the benchmark where you're incorporated." So I thought you guys handled that very quickly, but my sense from the index community is that the index community hates this topic of gaming, and yet there's still this constant debate as we just talked about, about Canadian names belonging in US indices. I'm curious in your case, how are your index overlords thinking about what the Russell US Index universe should look like in light of this globalization problem we've been talking about?
Arne Noack:
Yeah, sure. So first of all, Peter, I actually love the term overlord, so I will seek proximity to that. On a serious note, I think it's very good to distinguish between more global-oriented benchmark and a domestic benchmark. And really what our clients and industry participants expect from our Russell US benchmarks is in particular something like the US Russell 2000 to be really a US domestic benchmark, to be representative of the broad American economy and the companies, and some of which aren't very profitable, that's to be said, but still the need for representative benchmark. And in that sense, that's how the so-called overlords approach it in terms of the feedback that we receive and incorporate that very similar to what we heard in relation to the S&P. Really those feedback loops are important for us to make sure that any holes that may exist that they do get plugged. And so from our perspective, it's not only important where the company is incorporated, but also where the assets and revenues are based and come from. So in that sense, Russell, as an index provider, we seek to orientate more towards the domestic benchmark.
Peter Haynes:
So, JM, Waste Connections is considered, it's a Canadian company, but it's considered US for MSCI. It's considered Canadian by FTSE. FTSE considers Brookfield Asset Management US now, it's in both. So there's inconsistency across the benchmarks. I understand that. I don't like it, but I understand it. JM, is your perspective at MSCI similar to your peers on your left and right?
Jean-Maurice Ladure:
Absolutely. I think the big distinction on our flagships, MSCI World, MSCI ACWI, et cetera, et cetera, we are really creating those indices for global investors. So there's no space for gaps or overlaps. We make sure that every security belongs to just one country and no more than one, so they don't game it and certainly benefit from two potentially source of capital.
Now the rules, we try to keep it as simple as possible. If the primary listing is equal, the country of incorporation, that's it. We don't look further. And then if it gets a bit more complicated, it does not match, then to the same point as Arne and Louis, we will be looking at the location of the webinars, the boards, the way the headquarters are, and towards the end also what is the sentiment also of the market? Obviously like my counterparts, very happy to receive feedback, but we tend to use this feedback to really to look back at the message at the highest level. Are things need to be improved? Do we have things to plug? That's the kind of things. On stock by stock basis, we tend to just apply the message. The minute you start to open for feedback, then there's a lot of pressure coming one way or another, and we tend to stay away from this.
Peter Haynes:
Yeah. Arne, my colleague James Baugh from our London office spoke earlier about some of the rules that have changed on the listing side with the London Stock Exchange, the so-called merging together of primary and standard listings. I'm curious, as we see more and more UK companies migrating to the US re-domicile into the US, there's been a lot of concern about hollowing out of the UK market, same as Canada. I'm curious what steps are being taken by FTSE Russell to consider again, this issue of potentially keeping companies in the FTSE but might also may have moved to the US. How are you thinking about that issue, especially as there's lots of barking dogs back in the UK worried about that benchmark?
Arne Noack:
So the FTSE 100 as a benchmark has actually seen a bunch of evolution, in particular most recently allowing additional currencies to be-
Peter Haynes:
I'm glad you brought that up. I read it initially, wasn't a hundred percent clear on it, and you need to exactly explain what that means that additional currencies are now eligible for the index. What do you mean?
Arne Noack:
When you're listed on the London Stock Exchange, you not only have one listing currency, you can also trade in additional currencies such as obviously the sterling, but also the dollar and the euro. So essentially if a company that may or may not be domiciled in the US is listed there, but trading in a different currency, that's not as such an exclusion factor anymore. So with regards to your point on companies that may be incorporated in both the US for example, or the UK that-
Peter Haynes:
Listed in both, but incorporated somewhere, but it might be either of them.
Arne Noack:
Sorry, yes, listed in both. We look at country of incorporation. When a country is incorporated in the UK, essentially the liquidity test that is applied is relatively, is lowered. It is possible for a company to enter the FTSE 100 if it's not incorporated in the UK, if UK governance and listing standards are being adhered to. So there is flexibility in the rule set for the FTSE 100.
Peter Haynes:
Hypothetically Astrazeneca or Wise, which is a payment processor which just announced it was moving to the US, it seems to be happening frequently if these companies meet liquidity requirements, and what was the other thing you just said? Listing standards. They could remain-
Arne Noack:
Governance standards.
Peter Haynes:
Corporate governance standards. They could remain in the FTSE even if they're incorporated in the United States or reincorporated in the United States.
Arne Noack:
Theoretically. Well, obviously I will refrain also from commenting.
Peter Haynes:
I'm not asking about a specific-
Arne Noack:
This is a example.
Peter Haynes:
I'm really trying to ABC company here.
Arne Noack:
But yes, the rules could theoretically [inaudible 00:17:32]. Yes.
Peter Haynes:
Okay, yeah, that's good to know. Emiliano, back to when you were in State Street in Montreal in the mid-2000s, I'm going to guess a lot of the clients, the passive clients that you had were building their portfolios using domestic benchmarks. I've got exposure to Japan through the Nikkei, France through the CAC, et cetera, and I'm going to guess that that's changed where all your new passive clients that you're bringing on are using the global benchmarks primarily offered by the two to my left. I'm curious what would've happened to those legacy mandates that use the countries? Would they have over time transitioned away from country benchmarks to one of the global benchmarks, or do you still have legacy clients using those domestic benchmarks?
Emiliano Rabinovich:
Yeah, that's a great question. So a lot of things have changed over the years. When they started, we actually sub-advised quite a few mutual funds on behalf of some of the banks here and all these portfolios were tracking CAC 40, FTSE 100 topics and all these global indices, most of them were futures based because I think they were legacy from the foreign content tools.
Peter Haynes:
Pre-2005, right?
Emiliano Rabinovich:
Right. So we were investing in [inaudible 00:18:35] and then using futures to get the foreign exposure and currencies. Over time, the vast majority of these portfolios converted to a global portfolio. So most of them merged and became like MSCI World or Europe, Asia-PAC. So definitely the interests have shifted from local country investing to a broad global exposure.
Peter Haynes:
Just I want to follow on on the, on what we've just talked about, where is State Street's position, or even if you can say it's your personal position on whether you think as we evolve a namesake, could be in the FTSE 100 and the S&P 500 at the same time. Are you comfortable with that evolution?
Emiliano Rabinovich:
Going to take a step back. This is my personal view. I think the gravitational pool of the US market is so powerful and it's unlikely it's going to fade away anytime soon. But I think all these companies trying to seek listing in the US to eventually make it to the S&P 5 or MSCI World, I think that's not going to dissipate, right? So that's the reality. Our point of view as being that a company in an index should be a binary decision. Either you are in a country and you're in no other country, right? So we don't like the idea of 50-50 or anything like that.
Peter Haynes:
Yeah.
Emiliano Rabinovich:
I think that's efficient.
Peter Haynes:
I think S&P just came out with a survey, I think. Did you officially say that your S&P 200 would not go 50-50? It's going to go 100% to the country of incorporation, right? Is that what you said, Louis, I think?
Louis Bellucci:
Country of domicile, but yes.
Peter Haynes:
Was that the same thing?
Louis Bellucci:
Not always.
Peter Haynes:
All right, well we'll have to get a lesson on domicile down there or I can't keep it straight. Sorry, Emiliano.
Emiliano Rabinovich:
Without the broad global indices, you should be very clear. Apple cannot be in 25 countries. It has exposure to every country in the world. It's an American company. I think it's different from local benchmarks. The TSX would have very different roles from the S&P 5 or MSCI Canada and a local Canadian benchmark. It could have the ability to be very different. And I think local benchmarks should have a representation to the local opportunity set used for whatever reason, either benchmarking for active managers in ETFs, whatever the reason is. But I think the distinction has to be very clear and transparent, especially for people who don't have tools to look at portfolios in aggregate and avoid duplication of exposures. Things like that.
Peter Haynes:
Yeah, look, it's a complicated topic and I don't see easy answers. JM, as we were discussing this transition that Emiliano referred to at his firm, from those domestic building blocks to what are known as single global benchmarks, MSCI and FTSE for that matter have been the big beneficiaries of this move from country benchmarks to global benchmarks. The two of you lead that space globally. I'm curious if you can take us through how benchmark usage has been changing of late and amongst your user base globally. And in the case of the US market, have you seen any movement from the US funds that are either using S&P or Russell for their US exposure to an MSCI global as there's a lot of US investors that'll go S&P 500 plus MSCI global ex-US, that type of strategy. Have you seen any changes there?
Jean-Maurice Ladure:
Yeah, absolutely. I mean we see really two broad shifts. The first one exemplified by Emiliano is around this move from multi-benchmark country by country construction into a consolidated global benchmark. No gaps, no overlaps. That's where a lot of our clients are using our flagship MSCI world, MSCI EM, MSCI ACWI really as a policy benchmark. And we've seen it in term of the AUM now following our indices. Now we are over $18 trillion following the MSCI indices.
Peter Haynes:
Is that equity?
Jean-Maurice Ladure:
Yes, absolutely. Two-third active, one-third passive. I know earlier this morning you were asking Stelios, he was thinking maybe closer at least for us, but-
Peter Haynes:
He relayed two-thirds of people are active managers using US benchmarks.
Jean-Maurice Ladure:
Two-thirds of the AUMs following our indices-
Peter Haynes:
Is active managed strategies. Got it. Thank you.
Jean-Maurice Ladure:
Yes. Exactly. And then when you just add World and ACWI, which are the two big policy benchmark, we are half of these over overall 18 trillion. So 9 trillion are just following ACWI and World. So that's already something which is very established. The second thing we're seeing more from the US, definitely some of the managers there are starting to think, okay, well I need something which fits well with the rest of my investment outside the US. But also we see a very big trend in term of customization, for ETFs or for seg mandate and in those circumstances, clients come to us for our expertise on maybe thematic, on factors, sustainability, and climate. And then when they look at the US, because it's a derived index, they're a bit more relaxed and they're very happy to use MSCI USA as a starting parent index to then apply the strategy on top of it.
Peter Haynes:
And just as a follow on, I'm curious, it used to be a time when MSCI rebalances were taking place that folks in the United States, because of what I said a second ago, put their feet up, it's not an issue. More recently, those MSCI rebalancing days have become as almost as busy as S&P Quarterlies or the FTSE Russell or the Russell rebal. What has driven that increase in interest in MSCI US benchmarks? But first of all, am I correct in saying that there's been a huge growth-
Jean-Maurice Ladure:
Yeah, no, absolutely. And it is almost automatically first. You're taking those previous number I mentioned and you say, "Okay, MSCI ACWI, two-third of it is in the US. MSCI World, over 70% is in the US. Then we've got direct benchmarking into MSCI USA." You add up everything, you've got already 7 trillion just following basically MSCI USA. So that automatically means that it's be getting bigger and bigger. Obviously for all our indices, we have a lot of buffers in place, a lot of check in term of liquidity. So I think we can definitely digest those extra AUMs following MSCI USA. But yes, it's definitely happening. And very interestingly, actually we got a [inaudible 00:24:44]. We spoke about it with Emilio by the US investor this year for this current rebalancing because it was too close to Thanksgiving and they ask us could we consider moving it a bit earlier, but it's a lot more work for my team. But obviously for our clients it was very important and we receive a lot showing that yes, clearly there are a lot of US investors who want this to happen earlier because of Thanksgiving.
Peter Haynes:
And what date did you arrive on for the MSCI, the one coming up here?
Jean-Maurice Ladure:
That's on the 25th from my memory.
Peter Haynes:
So ahead of the-
Jean-Maurice Ladure:
Yeah, it would be right. Yeah, we prefer to prep on, absolutely.
Peter Haynes:
And I know when you get added to an MSCI index, a lot of you're automatically going to be into a sector in the US, and a lot of those sectors have a lot of very active sector related funds now, I think. Is that a contributing factor to the growth of your US-
Jean-Maurice Ladure:
Without also being impacted in the US.
Peter Haynes:
Got it. Okay. Louis, I want to ask a procedural question because we were talking earlier about some of the changes going on in the state of New York and their new mayor. That's just a procedural question. Texas Stock Exchange is going to be set to launch in the first quarter of 2026, and they're going to list stocks down the road. Can you just explain to the users here how your process works for when a company that's listed on the Texas Stock Exchange that qualifies otherwise for your index could be eligible for inclusion? What would need to happen?
Louis Bellucci:
Pretty straightforward actually. The S&P US indices methodology, including S&P 500 lists eligible US exchanges. Step one is going to be that Texas Stock Exchange would need to be added to that list. There's no gate-keeping or anything that's happening there. The index committee is going to look at the basics. That would be things like regulatory approval, obviously, which Texas already has, understanding the closing option, their continuing listing criteria, and of course ideally listings. So there are actually a couple of examples of this. In recent past, the BATS exchange was added to that eligible exchange list in 2016, the Investors Exchange was added a year after in 2017.
Notably, in both of those cases, they were added before there were any actual listings that could be eligible. There was a lot of feedback that that could have been a prohibiting factor for companies to even consider moving over to that or listing on that exchange. So again, no gate-keeping that's happening there. With step one completed, Texas, if it were to be added to the eligible list, there's obviously step two as well, which is that those companies need to then qualify for the rest of the S&P 500 criteria.
Peter Haynes:
Does someone have to ask you to do it, or is there a review process or would Texas come to you and say, "Here. This is what we've got"? Or how does that work?
Louis Bellucci:
Yeah, no, we're monitoring it. There's not a specific timing or review period for it, but we take these things as they come and we have our eyes on it.
Peter Haynes:
Okay, so just carrying on, this is a theme we've talked about all day in Louis, I'm carrying on with you here, concentration, the seven names. Various people today have had various views on this, but I'm curious what year as you as the index provider are hearing and seeing. The top seven names in the S&P 500 are all highly correlated names and they're all investing in each other it seems like, and they're approaching 40% of combined weighting. This is not the first time in US history that one group of securities has controlled this much weighting in the index, highly correlated to securities, but it's certainly the first time in modern investing history that it's happened and the dollars at risk are hard to even imagine. It's easy to say, "Let it ride." But I'm curious what kind of feedback you're receiving from index users. Is it time to consider capping at the sector level for the 500?
Louis Bellucci:
Well, I think the short answer is no, and we're not getting a lot of feedback that's clamoring for caps on the S&P 500. To your point there, it's true that these levels of concentration, and we know this thanks to the long history of the S&P 500, have not been the case since the 1960s. So it's been a really long time since we've seen this type of market dynamic from a concentration standpoint. But the reason why I think that this is more of an interesting talking point than it is something that there's real demand for change to be enacted for the S&P 500 is that, I'll name three things real quick. The first is that there are options. There's an S&P 500 equal weighted, there's an S&P 500 3% capped, and these options allow for those with concerns over concentration risk to evaluate or use these tools to express views on potential mean reversion or weigh opportunity and risk, right?
So that's one, is options. Two would be regulatory. And the US-listed products are subject to diversification requirements that say essentially weights above 5% cannot sum to greater than 50% of the product. If we use that rule, the current number from the S&P 500 I think is 27%. So it's way off and there's just really no pressure coming from that standpoint. Third, I think is actually just participation, is participation in the performance, full participation in the full performance of those mega cap household names that have been driving the market's performance up to these levels of concentration that we're at now.
Peter Haynes:
So that's the perspective of the index provider at the ground level. In talking directly to customers, is there concern about concentration of the MAG 7? Or amongst the clients that you have, are they asking you for solutions that might involve capping even if it's custom?
Emiliano Rabinovich:
I personally have not seen demand for capping for S&P 5. What we've seen is a lot of demand for products that try to diversify that concentration via different type of exposures in the US market. Examples of that, for example, the most diversified product you have, you alluded to equal weight, right? And equal weight products, by definition the most diversified exposure you can get, but that entails significant amount of active risk. So people who do not want to take so much risk, I think we've seen two avenues where most of the demand came from. One has been on the systematic side, like multi-factor approaches, exposure to factors, well-known factors. And the other one where we've seen quite an explosion in interest more than probably in the past 15 years has been around quantitative active enhanced solution where clients can tailor that exposure, take the amount of active risk they're comfortable with, and it allows them to diversify some of that top heaviness in the index. So I think investors are taking actions and diversifying whenever they can, but I haven't seen a specific demand for capping in the S&P 5.
Peter Haynes:
Okay. I want to move over to a technical issue for index providers. It's one that's on the agenda for S&P's meeting next week, and it's one that MSCI has already initiated survey on. We saw this at the turn of the century, a company that, who knows what industry, you heard it from Mike Whistle earlier, just add dot com at the end and the stock with double or triple. And we're seeing a similar trend of late with companies that are adding cryptocurrency holdings to treasury and in some instances are growing the asset base of their companies via equity offerings at a premium to NAV and then they're turning around and just buying Bitcoin or some other cryptocurrency. These companies have come to be known as digital asset treasury companies. They all have a normal business or most of them have a normal business, but then they take all their proceeds and all of a sudden most of their business becomes about owning crypto. Can you explain how the benchmark concerns have evolved with respect to this group and what have you heard from your users that you've been surveying, JM?
Jean-Maurice Ladure:
To take a step back, generally equity indices, they really include security which represent normal company with a normal operating business while funds are excluded from equity indices. Here we have company which have recently shifted their operating business to be primarily now holder of digital assets. If we take this example of this Japanese hotel company, Metaplanet, they barely do any hotel management anymore. They've made a massive public offering, I think it was back in September, so it's two-thirds of the free float. They did a public offering and they stated 95% of this will go straight into Bitcoin purchase. So I think that's a good example of what's happening. And I think for an equity index provider, there are two challenges. First, it's really determining the economic identity of those security. Are they really normal companies operating or are they really purely a vehicle for crypto exposure?
And when you say a lot of them still have a business, they may still have a bit of a business, but when you look at their assets, we can see a lot of them have having 80, 90% of their assets in crypto or digital assets. So that's the first challenge. The second challenge is because of those capital raising, they're able to shift their business super quickly. This company which maybe was classified as a hotel in gigs, within a quarter or two, may completely change its parts. And I think that's why I would say, okay, we need to react quickly on this. So we opened a consultation first to say, okay, I was the only one to have concern about it and the response from the market say, no, thanks a lot for looking into this very quickly. I think we very quick because it can very quickly become a snowball effect, and the bigger the snowball is, the more difficult it is potentially to stop it.
And then on the back of this, and we came up with proposal to potentially exclude those company if over 50% of the total assets are actually-
Peter Haynes:
So you put the line in the sand at 50%.
Jean-Maurice Ladure:
As part of the consultation.
Peter Haynes:
Oh, yeah.
Jean-Maurice Ladure:
That's our proposal. The consultation ends at the end of the year, December. The result will be published by January, and we are planning to implement by the February rebalancing.
Peter Haynes:
Just to be clear, that company Metaplanet that you used, or [inaudible 00:35:13] a strategy, one of these companies that's doing that, they're currently eligible to be in the indices. And have you kept them in the sector that they were in initially or have you... You haven't decided to change sectors because of [inaudible 00:35:24]
Jean-Maurice Ladure:
For the amendment, no, but we exactly. So we stopped or we frozen some of the things during the consultation. We are preventing any increase in the number of shares in the change in our inclusion factor. And also we've prevented any potential [inaudible 00:35:42] migration. So a company potentially, which is small cap, if we were to do all our normal calculation and movement potentially into our standard indices, everything is frozen. And we've published publicly on our website a preliminary list of the stock we believe potentially are in this situation. It's really available for everybody to look into. But as I say, it's preliminary and we haven't taken any decision. But I think we need to act quickly on this.
Peter Haynes:
Emiliano, have you guys started to think about this at State Street as its emerging issue? It's going to be on the agenda at the S&P meeting next week. Have you guys developed a position yet at your firm about where you draw the line? Are you in support of what MSCI is doing?
Emiliano Rabinovich:
We received a consultation. We are thinking about it and we haven't responded yet.
Peter Haynes:
It's going to be a topic that I think, and obviously FTSE.
Emiliano Rabinovich:
Yeah. It's not-
Peter Haynes:
You're not going to be an outlier here, Arne. I'm sure you guys are going to be following these developments and what the industry is telling you on that. Speaking of Arne, we would not be complete in any discussion about global indices if we didn't talk about South Korea. It's on the agenda every year. It's been an interesting year for South Korea because there was a period of time where they banned short selling, and it's very well known that FTSE and MSCI have different positions when it comes to the treatment of South Korea. You consider it a developed market, MSCI considers it an emerging market, and now more recently you've added Vietnam to, or will be adding Vietnam to its position out of frontier and into developing emerging or whatever-
Arne Noack:
Secondary.
Peter Haynes:
Secondary emerging is the term. What is it about Vietnam that has given you comfort that you can move forward and move it from frontier to secondary emerging, even though there are still some industry participants that would push back and say there are issues about omnibus accounts and other things that still mean that it's a difficult market to invest in?
Arne Noack:
So first of all, Vietnam as an economy, as a market, is actually very important, not only in the region but also globally. It's been, let's say in the political headlines in the US for various reasons, especially since President Trump took office. But let's say there is a consensus and recognition for the importance of the economy of Vietnam.
Now a key development that we have observed is essentially a change in legislation that allows local brokers to provide support in pre-funding trades, where essentially in the past they weren't allowed to which made access to the market extremely difficult, that's been removed and now they're allowed to. So we've seen progression to essentially by the Vietnamese authorities to invite international capital in to support economic activity locally.
If you read the recent announcement, which essentially as you say, Peter, clearly outlines a pathway for the Vietnamese stock market to be upgraded to secondary emerging market in October of next year. However, it is done with the contingency because we have received clear feedback from market participants from the large asset managers via our advisory boards, that there are still certain points of friction when trading the market. And essentially what, we'll in particular, the need to use a local broker when executing Vietnam that we've received assurances from the Vietnamese authorities, that steps are being taken to remove such a constraint, which would allow global brokers access to the market, therefore making the market accessible in a more, let's say, traditional way how investors-
Peter Haynes:
Is that a requirement before you'll include it or is that something that you're getting some comfort that that's the direction of travel?
Arne Noack:
So the global broker, that's not an explicit requirement. However, the requirement is that global investors have to be able to track the index. And essentially what we derive from the feedback is that if there's a strict requirement to only be able to use access the market via local brokers, that's a two constraining factor. And therefore we see that condition to be not satisfied. There is a interim review in March. If everything goes as expected, then Vietnam would be upgraded later in 2026. However, it's an important contingency to observe.
Peter Haynes:
And JM, I'll let you take the other side of this argument. You've been more conservative at MSCI in both South Korea and on Vietnam. Can you explain why you have a little more reluctance than FTSE to move it up classifications?
Jean-Maurice Ladure:
Yeah. I mean, South Korea, it's a longstanding story. We had them on the watch list from 2008 to 2014 to move up, yes, and then basically we decided, no, we're not there yet. So I got them out of the watch list. And fast forward 10 years, 11 years now, some of the issue at the time are still present, in particular the convertibility of the one offshore and still a significant issue. We've seen some enhancements, some improvement, but what we're hearing from our client it's still not enough. So yes, they have allowed some of the international institution to start to operate onshore on the interbank FX market with here have seen, they also extended the trading hours. So I'm sure there are a couple of people awake at night in Seoul available if needed.
But let's be clear to join the club of the developed market. And here, let's be clear. And I think same thing with should see, we are not here to classify a country or an economy. We're classifying the market and how accessible this market is. We're not there yet. We'll see again next year. And for us, and then maybe that's a bit of the slight differences. You need three things to consider reclassification. First obviously that we know the reform need to be announced, and this have happened in Korea, some have happened recently also in Vietnam. Then they need to be implemented and not necessarily always the case yet. And then they need to be sorely tested by our clients. And I think that's element where we are super careful, especially given the AUM following our indices.
Peter Haynes:
And what about this just quickly on Vietnam?
Jean-Maurice Ladure:
So Vietnam, we have this annual review. We left it as a frontier market in June 2025 with still some accessibility issue around foreign ownership limit around the FX market and some of the registration and other more technical limitation. And what we've learned from the past, and I will not name any markets that we've heard promises in the past say, "We will do this, we will do that, just get us promoted." And I say, "No, it's not working that way. That's the other way around." Not because MSCI decided to be tough on notice, our clients need to see this being in place. If we go too quickly and the pipes and everything is not properly done, it's a recipe for disaster. And the last thing we want is to have to revert a decision. When we really push or we put forward for a consultation for reclassification, we have already a good conviction that they're doing a good job. And this will be an irreversible decision.
Peter Haynes:
You don't want to make that mistake. JM, I just want to carry on with you as we're finishing up here. Before the ETF panel at the last five or six conferences, the topic of use of ESG benchmarks has been front and center, the topic of China and when you guys are going to allocate more to China, front and center. I'm just not hearing chatter on either of those topics, and I'm curious if that's because of the administration in the US do you think? And am I accurate to say that the amount of inquiries that you're getting at your organization for ESG type benchmarks has quieted down?
Jean-Maurice Ladure:
So I mean, you have ESG, you've got sustainability, you've got climates with different form also, is it exclusion based in class? So I think it really depends on the geography and on the client segment. So clearly in the US things have quieted down quite significantly. But there are other places in Europe, in Asia where actually there's still some good demand either for people who haven't taken the initial step to move into a benchmark, which incorporates those criteria still obviously being respectful on the fiduciary duty of the investors. So that's one thing. But we also see a lot of climates at the moment who are tweaking our existing ESG or climate or benchmark. So one which is not completely market cap. So we see, especially in Europe, a review of those things and enhancement or modification in particular around the tracking error of some of those indices. So that's actually-
Peter Haynes:
Meaning they're wanting to narrow the amount of tracking error, meaning they're reducing their constraints, so to speak, as-
Jean-Maurice Ladure:
Yes, exactly. They're looking again and they realize that maybe they've gone a bit too far. One very good example is what's happening with weapons where they realize, okay, they still controversial weapon and we consulted on this. Vast majority will not touch controversial weapon, but then nuclear weapons in the west where people are say, "Okay, well actually," especially in Europe, "this industry is still useful and need to be financed." So they review, and I think it's natural, it's still a young market in term of incorporating those criteria and people, our clients are adjusting and we are here to help them. And that actually keeping us-
Peter Haynes:
And what about China? Are you hearing more people want more exposure to A shares or are they comfortable not talking about it?
Jean-Maurice Ladure:
So China obviously there's big question about sanction potential on China's stocks or not financing those stocks. It is clear there. We've seen a massive demand in term of policy benchmark of doing ex China, or ex China ex Hong Kong can be World ex, can be ACWI ex, and we definitely see them, we've sent them in-
Peter Haynes:
Geographically concentrated in the United States those mandates?
Jean-Maurice Ladure:
We see them, yes, but we have other clients across the world, we've done it, but it's not that they necessarily don't invest in China anymore, but they've decided to split the initial policy benchmark into ACWI ex China and China, but then suddenly they've got the control of the relative weight between the two.
Peter Haynes:
So do you see demand to pull China out of emerging and treat it as a standalone just because it's so big and emerging and people are making bets directly around China?
Jean-Maurice Ladure:
Well, actually, it's not only from emerging markets, coming from emerging markets as investors, but we can see a lot more interest in term of having at least this granular choice of clients wanting to have ETFs, which will be country ETF, where they can invest in China, they can invest in India, they can invest in other emerging markets. So I think to Louis's point also, it's really about giving the choice and going the right setup for the investors.
Peter Haynes:
We're going right back to country, but I'm not going there. Arne, is there any difference to what you're hearing or seeing amongst your clients in either China or ESG?
Arne Noack:
I would say very consistent with what JM was sharing. In particular, I mean, my remit personally is the Americas. So the topic of sustainability climate to JM's point in the US has significantly taken, gone into the background and waned.
Peter Haynes:
Yep. Emiliano on the ground dealing with your clients, is everything you're hearing consistent with what you're seeing on the ground?
Emiliano Rabinovich:
A hundred percent. We launched this year a series of commingle trusts that are World ex, ACWI ex China, ex China ex Hong Kong as well. The geography of the clients, I think you would infer who they are. It's very concentrated in a few states in the US but there's been a lot of demand for that. Absolutely.
Peter Haynes:
Last question here for you, Louis. We're moving to 24 hour trading. It's inevitable. Trading day may no longer exist. That's my theory, at least in the long run. How have you started to think about these issues? I know that's on your agenda as well next week. How are you starting to think about these issues about how it affects how you determine index inclusion requirements and things like that?
Louis Bellucci:
Certainly we're witnessing a transformation for capital markets, thanks to some of these new technologies. I wish I had the answers, I don't. And it's on the agenda for our advisory panel next week as a discovery session to have a discussion with the market on what key considerations should we be making. But we've already rolled up our sleeves on this and we're asking a number of questions to ourselves and trying to get some feedback on those things as well. From a methodology standpoint with decentralized trading, do we need to think about how we go about measuring liquidity and eligibility for our indices? It will, traditional metrics continue to capture what the actual liquidity of those securities is. A bit more operational, but in a world that trades around the clock, how or when do we publish our material announcements that typically happen while markets are closed?
Peter Haynes:
When do you readjust your index divisors? That's the one that no one's talking about.
Louis Bellucci:
Absolutely, for that matter, do we need to rethink what an official close is, right? And that rollover to next day.
Peter Haynes:
I know.
Louis Bellucci:
How doess that from an index standpoint, which is a little more theoretical, transfer into the practical reality?
Peter Haynes:
Is your index at five o'clock going to reflect the index that was there at 04:00, even though the benchmark changed at 04:00, but you haven't had a chance to change the divisor? Thinking about these things too.
Louis Bellucci:
Right. Absolutely.
Peter Haynes:
Yeah.
Louis Bellucci:
And so S&P is looking at this from what type of operational resources do we need? What sort of technology infrastructure might there be needed so that we can continue to support our clients and power markets at large? But without having the answers just yet, continuing to explore this, stay ahead of it, and then help innovate along with it.
Peter Haynes:
Well, there's one thing I've heard consistently across all three speakers from the index providers today, and that is a willingness to listen to the industry and the feedback that we all have as users. I strongly encourage everyone out there to respond to the surveys. We just heard how much they matter in terms of the decision-making, it's the lens into the market. So thank you all three of you for joining us and Emiliano for providing us with your perspective from State Street. That was a great panel. So thank you very much.