As MSCI’s head of global index management research, Sebastien Lieblich oversees the company’s market classification framework. In the interview that follows, Sebastien discusses the process for adding countries to MSCI’s Emerging Markets Index and reviews both the recent addition of Pakistan and a proposal by MSCI to include Argentina in the index starting next year.

What factors does MSCI consider for upgrading a country from frontier to emerging market status?

The decision depends on two criteria that are detailed in MSCI’s market classification framework. First, we examine whether the country’s equity market meets minimum size and liquidity requirements. Second, we assess the extent to which the market is open to international investors.

To be classified as an emerging market, a country must meet both criteria. With respect to size, the designation requires a minimum of three companies that have a market capitalization of between $1.27 and $2.92 billion each, as of April 19, 2016. MSCI also looks at measures of liquidity.

MSCI uses 18 distinct measures to assess accessibility. The measures, which can be found in our Global Investable Market Index methodology, examine:

• Openness to foreign ownership
• Ease of capital inflows and outflows
• The efficiency of the market infrastructure
• The competitive landscape and stability of the institutional framework, including, for example, the stability of the economic system and the country’s adherence to such principles as the rule of law.

How frequent are these upgrades?

We regularly review the market classification of all countries included in the MSCI indexes to ensure that they continue to reflect the evolution of the different markets. Every June, MSCI announces the conclusions about the list of markets under review that year and announces new markets, if any, to be reviewed for potential reclassification in the upcoming cycle.

Can you explain what it means to add a country to the review list, like Argentina?

Adding a country to the review list begins a year-long process during which MSCI consults with asset owners, asset managers, brokers and other market participants, as well as with local authorities, regulators and stock exchanges. The consultation ensures that our decision reflects investors’ experiences with market accessibility rather than merely an abstract analysis of regulatory language or market conditions.

With Pakistan, what improvements did you see that played a role in the country’s reclassification to emerging markets status?

Liquidity has improved dramatically during the past two years and Pakistan’s equity markets have demonstrated openness to foreign investors. Favorable developments include the creation of a unified exchange under the umbrella of the Pakistan Stock Exchange, the introduction of an independent regulator, and the introduction of regulations that protect investors and facilitate fair and efficient markets.

How have recent developments in Argentina contributed to the country being added to the review list?

Following a series of reforms, the Argentinian equity market now meets most of the accessibility criteria for emerging markets. In December, the Argentine Central Bank lifted controls on both the peso and on capital that had been in place for a number of years. The changes have resulted in, among other things, a currency whose value fluctuates in response to the foreign-exchange market and improvements in liquidity.

Why do some indexes use depository receipts?

In countries that impose currency controls or for which there is no offshore currency market, using depository receipts, which are quoted and traded in U.S. dollars, avoids exposing investors to foreign-exchange constraints.

What impact do you tend to see on a country and its capital markets when it is upgraded by MSCI from frontier to emerging?

There is approximately $10.5 trillion benchmarked to MSCI’s indexes worldwide, including $1.5 trillion benchmarked specifically to MSCI’s Emerging Markets Index, as of 12/31/2015.  When a market is upgraded to emerging status, by default, it becomes part of the universe that many global investors focus on. It hits their radar.

When did MSCI last upgrade a country to emerging market status?

Prior to the reclassification of Pakistan, the last change to MSCI’s Emerging Markets Index occurred in 2014, when we added United Arab Emirates and Qatar. We announced that change in June 2013, at which time the two countries accounted for 0.85% of the index, on a pro forma basis. A year later, on the day of inclusion, they accounted for 1.15% of the index. As of MSCI’s most recent index rebalance, the countries accounted for 1.80%.