Market participants often use widely known interest rates as reference rates in financial markets to measure performance, discover prices and reduce information asymmetry. Reference rates are critical as they underpin the pricing of many financial contracts and are used to measure the performance of large investment funds, making them important to the global financial system. Examples of reference rates include the London Interbank Offered Rate (LIBOR) and the Johannesburg Interbank Average Rate (JIBAR).
The Johannesburg Interbank Average Rate (JIBAR) is a reference rate that is most widely used as a short-term money market benchmark interest rate. JIBAR is constructed using quoted rates for Negotiable Certificate of Deposits (NCD) by the largest banks in South Africa. The SARB (South African Reserve Bank) is the administrator of JIBAR and has the primary responsibility for all aspects of the determination process and the integrity of the reference rate.
As a G20 member, South Africa is represented on the Financial Stability Board’s (FSB) Official Sector Steering Group (OSSG) to ensure that the local interest rate benchmarks adhere to international best practices and adopt reform programmes where necessary. According to the principles for financial benchmarks developed by the International Organisation of Securities Commissions (IOSCO), an essential characteristic of a benchmark interest rate is for it to be underpinned by a large number of transactions. However, JIBAR is not currently underpinned by a large number of transactions. Furthermore, the market activity in three-month negotiable certificates of deposit (NCDs), which forms the basis of the most widely referenced three-month JIBAR has declined both in nominal terms and as a share of wholesale bank funding. Currently, three-month NCD volumes make up less than 5% of NCD issuance and the current methodology calculation for the JIBAR is vulnerable to potential manipulation. In addition, the SARB found that the volumes of the underlying three-month NCD markets, relative to other types of funding, are not high enough. Moreover, JIBAR is based on indicative prices not actual transactions. The renewed JIBAR setting is now based on live quotations on increased transaction amounts and a very strong governance framework, fully in line with the IOSCO Principles for Financial Benchmarks.
Additionally, the SARB has established an industry working group called the Market Practitioners Group (MPG) which is responsible for driving the local reforms. The MPG committee has collected five years of data from South Africa’s top four commercial banks and the JSE. It has devised a RFR which it considers to be robust and will meet international standards.
On November 2020, the Deputy Governor of SARB confirmed that JIBAR would cease and that a transition to alternative reference rates will take place. To date, the expectation is that JIBAR may cease in 2024 and that the proposed overnight RFR, ZARONIA (South African Rand Overnight Index Average) which is an unsecured overnight rate will serve as a reference rate for a significant number of financial contracts.
Similar to the LIBOR, the replacement will result in two implications:
- Any existing loan agreements that extend beyond 2024 will need to incorporate a fallback position for when JIBAR is discontinued, and lenders and borrowers will need to start considering this.
- Based on Global trends, new and refinanced loans should reference risk-free rates.
In addition, this RFR will respond to policy rate changes and is expected to be more resilient than JIBAR, partly because of the depth and liquidity of the markets that underpin it. The MPG has been tasked with directing market participants through an orderly transition away from JIBAR towards the use of alternative reference rates such as ZARONIA, in anticipation of JIBAR’s ultimate cessation. While JIBAR rates were based on discussions between leading banks on what they expected to charge each other for interbank lending, i.e., these were forward-looking rates, the new risk-free rate (RFR) will be based on actual transactions, i.e., it will be backward-looking, and therefore more objective.
ZARONIA is a financial benchmark rate that reflects the interest rate at which rand-denominated overnight wholesale funds are obtained by commercial banks. Furthermore, ZARONIA is based on actual transactions and calculated as a trimmed, volume-weighted mean of interest rates paid on eligible unsecured overnight deposits. On each South African business day, ZARONIA is determined as a trimmed, volume-weighted mean of the central 80% of the distribution of interest rates paid on eligible unsecured overnight call deposits, rounded off to three decimal places.
ZARONIA has been back-tested using a five-year sample of bona fide transactions collected from commercial banks and was rigorously tested to ensure that it is reliable, robust and sufficiently stable. The back-testing results were published in a report titled ‘Feedback on the draft statement of methodology and policies governing the SARB-administered interest rate benchmarks. The SARB is the administrator of ZARONIA and will produce and publish the rate in accordance with the terms specified in the ‘Draft statement of methodology and the policies governing the SARB-administered benchmarks’.
The publication of ZARONIA signifies an important milestone in the effort to reform interest rate benchmarks that are used as reference rates in the South African markets. However, although ZARONIA is available, it is only being published for observation only and there is no expectation for market participants to be referencing the rate in their transactions or exposures, unless otherwise advised by the SARB.
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