Constituents in the IHS Markit EMIX indices are chosen from a liquid universe as described in the “Ground Rules” documents. Using the EMIX “Liquid Universe” as the basis for forming the indices ensures broad representation of global equity markets and adequate liquidity of the individual constituents.
As financial markets evolve, some of the stated rules for determining the liquid universe no longer reflect the realities of the markets. In particular, the thresholds used to include or exclude securities from the liquid universe are no longer compatible. Steps four and five of the process to determine the liquid universe state:
1. Locate the turnover ratio which represents the threshold above which 99.95% of the total market capitalisation falls. (Typically, this is around 0.015% to 0.020% turnover per day.) This is the Minimum Threshold.
2. Remove constituents from the Liquid Universe where [the] daily turnover ratio is below the Minimum Threshold.
The two thresholds defined in the above rules are no longer compatible and do not achieve the aim of ensuring adequate liquidity and broad representation in the indices. Securities around the 99.95th percentile of overall market capitalisation usually have a median daily turnover significantly smaller than 0.015%. In December 2019, for example, the median daily turnover observed for securities at the 99.95th percentile of total market capitalisation was around 0.0000009%.
To preserve the objective of ensuring representation and liquidity in the EMIX indices, the threshold for total market capitalisation will be set at the 97.5th percentile of total market capitalisation starting with the upcoming March 2020 rebalancing. This adjusted threshold achieves a median daily turnover more in line with the one stated and intended in the Ground Rules documents.
The overall index turnover (measured by market capitalization) resulting from this change varies by index family but is in line with turnover experienced in previous rebalancing periods. While a greater number of securities will be removed from the indices than what has been observed in recent rebalances, these securities generally have a small market capitalisation and/ or are illiquid.
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