Ground Rules FTSE China B Index Series v2.6 ftserussell.com June 2016 Contents 1.0 Introduction ......................................................................... 3 2.0 Management Responsibilities ............................................ 5 3.0 Eligible Securities ............................................................... 6 4.0 Indexes Algorithm and Calculation Method ................... 10 5.0 Periodic Review of Constituents ..................................... 12 6.0 Changes to Constituent Companies ............................... 14 7.0 Changes to Constituent Weightings ............................... 16 8.0 Industry Classification Benchmark System (ICB) .......... 17 Appendix A: Markets & Stock Exchanges ................................ 18 Appendix B: Eligible Markets, Exchanges & Exchange Rates ...................................................................... 20 Appendix C: Index & Market Opening and Closing Hours ...... 21 Appendix D: Status of Indexes .................................................. 22 Appendix E: Further Information ............................................... 23 FTSE Russell | FTSE China B Index Series, v2.6, June 2016 2 of 23 Section 1 Introduction 1.0 Introduction 1.1 This document sets out the Ground Rules for the construction and management of the FTSE China B Index Series. Copies of the Ground Rules are available from FTSE Russell (see Appendix E) and www.ftserussell.com. 1.2 The FTSE China B Index Series is designed to represent the performance of the mainland Chinese market that is available to international investors (including QFII) and domestic Chinese investors with the obligatory foreign currency accounts. The FTSE China B Index Series includes the following indexes: 1.2.1 FTSE China B 35 Index This index comprises the 35 largest companies by full market capitalisation of the FTSE China B All- Share Index. 1.2.2 FTSE China B All-Share Index The FTSE China B All-Share Index is a benchmark Index designed to represent the performance of all B Share companies that meet the stated eligibility requirements. 1.3 The FTSE China B Index Series includes companies that trade on the Shanghai and Shenzhen Stock Exchanges. An explanation of the structure of the Chinese market is included in Appendix A. 1.4 FTSE Russell FTSE Russell is a trading name of FTSE International Limited (FTSE), Frank Russell Company (Russell), FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and MTSNext Limited. FTSE, Russell and FTSE TMX are each benchmark administrators of indexes. References to FTSE Russell should be interpreted as a reference to the relevant benchmark administrator for the relevant index. 1.5 FTSE Russell hereby notifies users of the index series that it is possible that circumstances, including external events beyond the control of FTSE Russell, may necessitate changes to, or the cessation of, the index series and therefore, any financial contracts or other financial instruments that reference the index series should be able to withstand, or otherwise address the possibility of changes to, or cessation of, the index series. FTSE Russell | FTSE China B Index Series, v2.6, June 2016 3 of 23 1.6 Index users who choose to follow this index series or to buy products that claim to follow this index series should assess the merits of the index’s rules-based methodology and take independent investment advice before investing their own or client funds. No liability whether as a result of negligence or otherwise is accepted by FTSE Russell for any losses, damages, claims and expenses suffered by any person as a result of: • any reliance on these Ground Rules, and/or • any errors or inaccuracies in these Ground Rules, and/or • any non-application or misapplication of the policies or procedures described in these Ground Rules, and/or • any errors or inaccuracies in the compilation of the Index or any constituent data. FTSE Russell | FTSE China B Index Series, v2.6, June 2016 4 of 23 Section 2 Management Responsibilities 2.0 Management Responsibilities 2.1 FTSE International Limited (FTSE) 2.1.1 FTSE is responsible for the daily operation of the FTSE China B Index Series. FTSE will maintain records of the market capitalisation of all constituents, and will make changes to the constituents and their weightings in accordance with the Ground Rules. FTSE will also carry out the periodic reviews of the FTSE China B Index Series and implement the resulting constituent changes as required by the Ground Rules. 2.1.2 Changes to constituent weightings are made by FTSE in accordance with the Ground Rules. FTSE will also be responsible for publicising changes to constituent weightings. 2.2 Recalculations 2.2.1 The FTSE China B Index Series are recalculated whenever errors or distortions occur that are deemed to be significant. Users of the FTSE China B Index Series are notified through appropriate media. For further information refer to the FTSE Russell Recalculation Policy and Guidelines document which is available from the FTSE Russell website using the link below or by contacting [email protected]. www.ftse.com/FTSE_Russell_Index_Recalculation_Policy_and_Guidelines.pdf 2.3 Status of these Ground Rules 2.3.1 These Ground Rules set out the methodology and provide information about the publication of the FTSE China B Index Series. FTSE Russell | FTSE China B Index Series, v2.6, June 2016 5 of 23 Section 3 Eligible Securities 3.0 Eligible Securities 3.1 All China B share classes of equity in issue are eligible for inclusion in the FTSE China B Index Series subject to conforming with Rules 3.2 to 3.9 (see also Appendix A & B). 3.2 The entire quoted equity capital of a constituent company is included in the calculation of its market capitalisation, subject to the free float restrictions highlighted in Rule Error! Reference source not found.. 3.3 FTSE Russell calculates free float from the perspective of a portfolio shareholder. This allows FTSE Russell indexes to take into account the true opportunity set available to an investor. 3.4 In order to calculate the free float of a company FTSE Russell will screen all publically available shareholder information, regardless of the size of holding, and identify them as either restricted or unrestricted holdings. 3.4.1 Further details on free float restrictions can be accessed using the following link: http://www.ftse.com/products/downloads/Free_Float_Restrictions.pdf 3.4.2 Free float weighting Free float restrictions will be calculated using available published information. For Equity Shares of companies which have been admitted to the Index that have a free float greater than 5%, the actual free float will be rounded up to the next highest whole percentage number. Companies with a free float of 5% or below are not eligible for inclusion in the Index. FTSE Russell | FTSE China B Index Series, v2.6, June 2016 6 of 23 Free float example – determining the initial free float Shareholder type Shareholding % Government controlled 26.65 Corporate Investment 5.52 Employee share incentive scheme 0.76 Director/Senior management holding 0.14 Actual free float 66.93 Rounded free float 67.00 The table above shows the free float structure of a company, in particular the restricted shareholders, as highlighted in Rule Error! Reference source not found.. Almost 27% of the company’s shares are in the control of the government with a further 5.5% held by a corporate investment. In total the company’s restricted shareholders account for 33.07% of its shares. The actual free float of the company is 66.93% (100 - 33.07). The free float will be rounded to the next whole percentage at 67%. 3.4.3 Percentage point thresholds Following the application of an initial free float restriction, a constituent’s free float will only be changed if its rounded free float moves to more than 3 percentage points above or below the existing rounded free float. Where a company’s actual free float moves to above 99%, it will not be subject to the 3 percentage points threshold and will be rounded to 100%. A constituent with a free float of 15% or below will not be subject to the 3 percentage points threshold. Free float example – determining the free float of a company if its free float changes Time Point A Time Point B Time Point C Actual free float 49.61% 51.61% 61.41% Rounded free float 50.00% 50.00% 62.00% The table above shows the actual free float of a company over three time horizons - Time Point A, B and C. At Time Point A the company has its initial free float rounded. As its actual free float is 49.61%, its rounded free float is 50% (see Rule 3.4.2). At Time Point B, the company’s actual free float changes to 51.61%. As its actual free float is not 3 percentage points above the threshold of 50%, its free float will remain at 50% and not move to the next rounding of 52%. At Time Point C, the company’s actual free float changes to 61.41%. As its actual free float is now 3 percentage points above the initial threshold of 50%, its free float will now change from 50% and move to the next free float rounding of 62%. 3.4.4 A company that has a free float greater than 5% but less than or equal to 15% will be eligible for the index providing its full market capitalisation is greater than USD 2.5 billion or local currency equivalent, and it qualifies in all other respects. The actual free float will be rounded up to the next highest whole percentage number. FTSE Russell | FTSE China B Index Series, v2.6, June 2016 7 of 23 Free float example – determining the free float of a company with a free float of 15% or less Shareholder type Shareholding % Government authority 47.34 Government controlled 47.02 Actual free float 5.64 Rounded free float 6.00 The table above shows the free float structure of a company, in particular the restricted shareholders, as highlighted in Rule Error! Reference source not found.