International index companies have eliminated Russian securities one after another and vigorously developed an independent and controllable index system

Recently, the conflict between Russia and Ukraine has triggered the United States and other Western countries to introduce sanctions against Russia. International index companies have also followed suit, FTSE excluded Russian securities from all indices, S&P Dow Jones and MSCI excluded Russian securities from emerging markets, effective after the close of march 4, March 8 and March 9, respectively, and passive funds tracking these indices will liquidate all Russian securities when they can sell.

Recently, international index companies have sorted out the treatment of the Russian market

Since late February, the conflict between Russia and Ukraine has escalated, and the United States and other Western countries have imposed specific entity investment restrictions on Russia, excluded major Russian banks from SWIFT, prohibited financial institutions from trading Russian government bonds, and frozen the foreign exchange reserves of the Russian central bank, resulting in sharp fluctuations in the Russian financial market, for which Russian exchanges have continued to close from February 28 to now. Three major international index companies, such as MSCI, FTSE Russell and S&P, conduct relevant treatment of Russian securities in the index.

1. The basis for processing by overseas index companies

MSCI and other overseas index companies are mainly based on the following two considerations: First, investment restrictions, specifically to see whether the sanctions will affect the investability and reproducibility of THE MSCI index; The second is market accessibility, depending on whether sanctions will affect the convenience of international investors investing in the Russian market, focusing on the type, scope and duration of sanctions.

Measures that can be taken include: securities freezing, securities exclusion, Russian index freezing, etc., and market classifications can also be adjusted. MSCI will make a decision based on five criteria: openness to foreign investment, ease of capital flows, efficiency of operating framework, availability of investment tools, and stability of institutional framework, and make decisions after consultation on market opinions.

2. MSCI and other index institutions related processing timeline

As the situation in Russia and Ukraine develops, international index companies are updating in a timely manner to issue announcements to solicit market opinions.

On February 14, in response to tensions between Russia and Ukraine, MSCI announced that it would analyze the impact of any sanctions on international investors and consult with market participants to possible special treatment of specific securities.

On February 24, MSCI announced that due to the sanctions imposed on Russia, including the freezing of Russian companies' assets in the United States, investment restrictions, etc., it decided to give special treatment to Russian securities in the MSCI stock index from the regular adjustment of the quarterly index at the end of February 2022. Specifically: the freezing of all Russian securities, msci has previously announced changes in the Russian sample in the index, will no longer be implemented at the time of quarterly adjustment.

On 28 February, MSCI further announced that, due to recent negative developments such as sanctions against Russian companies, restrictions on trading securities on Moscow Exchange, the exclusion of Russian banks from SWIFT, the suspension of trading on moscow, and the deterioration of convertibility in the Russian ruble, MSCI sought feedback from market participants on the appropriate treatment of the Russian stock market in the index, including the division of Russia from emerging markets to independent markets.

On March 3, MSCI announced that from the feedback received from market participants, the vast majority believed that the Russian market was currently non-investable, and finally decided to remove Russia from the MSCI Emerging Markets Classification and reduce it to the Independent Market Classification (that is, excluding the investment index system), and all Russian securities in the MSCI Emerging Markets Index were excluded and took effect after the close of trading on March 9.

FTSE Russell and S&P Dow Jones handle similar considerations and processes to MSCI. On March 3, FTSE Russell announced that after the market opinion consultation, in view of customer feedback that it is not possible to trade the Russian market, all Russian securities will be excluded from the FTSE Russell Stock Index and will take effect after the close of trading on March 4. On March 4, S&P Dow Jones announced that after a market opinion consultation, russia was removed from the MSCI Emerging Markets Classification and downgraded to the Independent Markets Classification in view of the deteriorating level of access to the Russian market, while the exclusion of all Russian securities from its flagship stock index would take effect after the close of the market on March 8.

The market impact that international index firms deal with

Due to the large influence of the emerging market index of MSCI, FTSE and other index institutions and the large number of tracking passive funds, Russia was removed from emerging markets and had a great impact on its market. At present, the weights of Russian securities in the MSCI Emerging Markets Index and the FTSE Emerging Markets Index are 1.5% and 1.3% respectively (due to the recent decline in the Russian market by nearly 50%, the weight is about 1.5 percentage points lower than the previous 3%). MsCI and FTSE Emerging Markets Index track more funds, and after Russian securities are excluded from MSCI and FTSE Emerging Markets, the market expects passive funds to flow out of the Russian stock market by about $10 billion.

If Russia is removed from emerging markets, its original weight will be allocated to the remaining emerging market countries, and the weight of A shares will increase accordingly, roughly estimating that the weight of A shares in MSCI and FTSE emerging markets will increase from the current 5% and 7% to 5.1% and 7.1%. Since the international index company adopts the "price zero" method to exclude Russian securities, that is, it is equivalent to a direct shrinkage of passive capital assets, so before and after the effective date of elimination, passive funds will not change, and there will be no inflow or outflow of funds to A shares. In the future, if the passive capital assets of MSCI and FTSE are tracked and increased due to fund subscription, issuance and other reasons, the funds flowing into A shares will be more than at present.

Enlightenment for the development of the international influence of local indices

With the vigorous development of global indexed investment, the index has increasingly become the "baton" to guide the flow of funds, which is related to the international influence and discourse power of the capital market, and its importance in international competition has also increased significantly, and even become a political tool in the game of great powers.

On the one hand, the scale of funds tracked by international index institutions such as MSCI amounts to trillions of dollars, and whether they include a country in the global index system has affected the internationalization process of the capital markets of relevant countries to a certain extent.

On the other hand, after a country or part of its securities are subject to a US investment ban for political reasons, international index institutions are likely to announce their removal from their index systems, further exacerbating the volatility of the country's capital market.

Since 2020, the U.S. government has added a total of 68 Chinese companies to the investment ban list, prohibiting U.S. companies and individuals from investing. Overseas index institutions such as MSCI, FTSE, S&P Dow Jones and others will exclude A-shares of companies involved in the company in view of the inability of international investors to continue trading.

Taking MSCI as an example, it removed a total of 18 A-shares that originally belonged to emerging market indices, and foreign passive funds followed and sold, causing certain disturbances to the trend of related stocks. Therefore, vigorously developing the local independent and controllable index system and enhancing the international influence and competitiveness of local indexes has become an important task to a certain extent.

At this stage, MSCI, FTSE Russell and other European and American index suppliers have absolute advantages in global index compilation, and there is no global index system in Asia that can compete with it, and it is necessary for the mainland to independently establish an independent and controllable global index system to grasp the international discourse.