UPDATED: “A MIRROR OF THE MARKET, NOT AN ARBITER OF IT” — STRATEGY TELLS MSCI TO WITHDRAW — THE TEST TURNS ON A WORD NO ACCOUNTING STANDARD DEFINES

We wrote yesterday about how MSCI's rewritten screen manages to be asset-neutral and still land on the same three companies. Here is the part nobody has looked at: the word the whole test rests on.

MSCI's screen turns on whether a company's assets are operating or non-operating. Step one asks whether operating assets are more than half the total. Step two applies five ratios, and four flags mean deletion. Every one of those tests requires you to know which assets are which. Search MSCI's document for a definition of the term. There isn't one.

That is the center of the letter Michael Saylor and Phong Le sent MSCI's Equity Index Committee on August 31. Their argument is not that the numbers are wrong. It is that the category is invented. Neither U.S. GAAP nor IFRS sorts assets into operating and non-operating. No legal framework does. The Investment Company Act and the SEC's shell-company rules already define non-operating companies and they look nothing like this. Their sentence: MSCI “decided to exclude DATs first and built a formula to launder that policy judgment.” They want it withdrawn, and they ask MSCI to stay “a mirror of the market, not an arbiter of it.”

The scale is worth working out yourself, because MSCI hands you the numbers. Deleted: Strategy at $23.93 billion of float-adjusted market cap, Yellow Cake at $1.81 billion, Metaplanet at $654 million. Watchlisted: Center Laboratories at $673 million, Lydia Holding at $319 million, SharpLink at $165 million. Add all six and Strategy is 87 percent of the money. MSCI names no problem it is solving, no gap in the existing rules, and no customer who asked for it.

Now the part that has not been reported anywhere, and it does not help Strategy. MSCI's appendix grades on a curve. A company already in the index gets easier thresholds — operating assets under 10 percent instead of under 20, outside financing above 30 percent of assets instead of above 20 — and it has to fail in two consecutive annual reviews before removal. Fail once and you land on the watchlist. Strategy is not on the watchlist. Strategy is on the deletion list.

Both things are true and neither cancels the other. MSCI built a test on a word it will not define. Strategy fails that test twice, after MSCI grades it gently. Feedback closes September 30 and the answer comes by October 16. An index is a list somebody maintains. The coins are on a ledger that needs no committee to agree what they are.

UPDATE, 9:05 PM ET. Strategy's actual letter, posted at strategy.com/msci, has the numbers the first read missed. MSCI's own index funds hold 13 million shares of Strategy stock, 3.1 percent of everything outstanding. Sounds large until you check it against the tape: that's less than 60 percent of one day's average trading volume, against two full days of volume for the companies MSCI already deleted from its World index back in May. Strategy already lived through a bigger forced sale than this one. The letter also answers the accounting question MSCI never asked out loud. Strategy reports its bitcoin as an operating segment under GAAP, a structure it says it worked out directly with SEC staff, not something invented for this fight. Strategy's own word for the MSCI proposal: misguided. Its read on the motive: “a pretext for targeting Digital Asset Treasury Companies.” MSCI's calendar now carries a hard date for the deletion, December 1. The letter argues there is no fire here. The date on MSCI's calendar says someone there thinks otherwise.