MSCI: Qatar, UAE Remain ‘Frontier’ For Now

Qatar and the United Arab Emirates will remain for now classified as frontier countries in MSCI’s classification system. But the index provider said they are still under consideration for reclassification as emerging markets as part of the index provider’s 2012 annual classification review next June, a decision that would affect the constitution of some of the world’s biggest ETFs.

At the time of its annual classification in June 2011, MSCI had said it would revisit the status of the UAE and Qatar in December. At that time, it decided that South Korea and Taiwan would remain emerging market countries, and that it would reconsider the two Asian countries for reclassification as developed countries as part of its June 2012 annual review.

The MSCI review is crucial to ETFs such as the $42 billion Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO) and its rival fund that uses the same benchmark, the $32 billion iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM). Had the two Middle Eastern countries been promoted to emerging markets status, they would have become part of the index that underlies the two ETFs.

Explaining its decision on Qatar and the UAE, MSCI said in a press release that market participants need additional time to assess the effectiveness of “delivery versus payment” models on the Qatar Exchange, the Dubai Financial Market and the Abu Dhabi Securities Exchange. It also said regulators and stock exchanges need more time to address remaining concerns of international institutional investors.

United Arab Emirates

Regarding Qatar, the feedback from such investors has been positive since June 2011, but the investors continue to be concerned over the effectiveness of the “delivery versus payment” framework to fully ensure the safeguarding of their assets under certain circumstances.

MSCI said this is particularly true for failed trades where a forced sale of assets without the owner’s consent remains a possibility.

Because of this, many international institutional investors and their custodians continue to view the use of a dual account structure as a requirement.

Introductions of new rules allowing for securities borrowing and lending as well as short selling have been raised by market participants as a possible way of resolving these outstanding issues.

MSCI noted that the Emirati regulator—the Securities and Commodities Authority—has already published regulation drafts on these topics, MSCI said in its press release.


Regarding Qatar, MSCI said stringent foreign ownership limits, even on large companies, remain a big concern to international institutional investors. The availability of shares to such investors is not only limited, but also potentially quite volatile.

MSCI noted that no changes to address this concern were implemented during the June 2011 to December 2011 review period.

MSCI stressed that Qatar’s promotion to emerging market status was predicated on a meaningful increase of foreign ownership limit levels on Qatari firms.

On a more positive note, MSCI said the feedback from international institutional investors regarding the “deliver versus payment” model in the Qatari equity market was positive, as it was regarding the UAE’s so-called DVP model.

That said, the same concerns also exist in Qatar, as they do in the UAE, related to international investors thinking they need to operate with a dual account structure to offset the risk of forced sales in the case of failed trades.

Qatari officials are making progress on the possible introduction of new rules governing securities borrowing and lending agreements as well as short selling. However, MSCI said it wasn’t aware of any official communication from the Qatari regulator on these topics.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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