RISK MANAGEMENT | 25 March 2024

Benchmark Reform:
JIBAR to ZARONIA

Absa | Corporate and Investment Banking > Insights and Events > Benchmark Reform: JIBAR to ZARONIA
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South Africa’s financial realm is undergoing a significant shift from the Johannesburg Interbank Average Rate (JIBAR) to the South African Overnight Index Average (ZARONIA).

This transition is part of a broader global initiative to reform benchmark rates, echoing the recent phasing out of other Interbank Offered Rates (IBOR) such as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA).

What is Benchmark Reform and why is it needed?

Benchmark Reform is a global initiative to enhance the stability and reliability of benchmark rates that underpin financial transactions. The initiative is aimed at improving the transparency and strengthening the credibility of existing benchmarks, such as JIBAR (and the other phased-out IBOR that were replaced with various risk-free overnight indices), to ensure a more robust and trustworthy financial system.

How is ZARONIA different to JIBAR?

The key difference between these rates lies in their calculation methodologies. JIBAR is forward-looking and relies on submissions of indicative pricing from a selected panel of banks. In contrast, ZARONIA is backward-looking and reflects actual observable transactions, which is why it is considered more credible and robust.

A summary of the key differences between the ZARONIA and JIBAR is shown below:

  1. Credit premium: the difference in yield between default-free obligations (e.g. government bonds), and securities issued by entities subject to credit risk, usually stated in terms of basis points
  2. Reference period: the time period over which the term/tenor is applied to calculate the applicable rate

The role of the SARB and the MPG

The South African Reserve Bank (SARB) together with the Market Practitioners Group (MPG) play a pivotal role in driving the transition from the JIBAR to the ZARONIA rate, to ensure the financial system’s stability. The MPG is a joint public and private sector body composed of the SARB, the Financial Sector Conduct Authority (FSCA) and senior professionals from various financial market groups that are active in the domestic money market. The MPG is collaborating to facilitate a smooth transition by providing guidance and support to market participants throughout the process. As of 3 November 2023, the SARB has endorsed the use of the ZARONIA for trading, making it available for use in transactions.

What to look out for

Key dates and milestones are yet to be finalised by the SARB. However, draft timelines are available on the SARB’s website, as shown below. As the industry adopts ZARONIA, announcements will be expected from financial institutions, regulatory bodies and the MPG outlining crucial steps and guidance to market participants.

Industry milestones as published by the SARB, 06 May 2024 Update on the Jibar transition plan (resbank.co.za)

Where to find out more

For more information on the transition and related announcements, follow the links below to the SARB website:

FAQs

1 What is the difference between overnight and term rates The ZARONIA overnight rate resets daily and is based on overnight wholesale funds in South Africa. Term rates are generally fixed for a specific tenor e.g. 3months, therefore, these rates are fixed upfront on the reset date.
2 Is there a forward-looking term rate similar to JIBAR? To date no recommendations have been made on the development of a forward-looking term rate. It may take some time before a viable term-rate is provided to the market. Absa is monitoring developments from the SARB on the developments of term-rates.
3 Can I use ZARONIA? Currently, ZARONIA is available for all linear derivatives.
4 Can I still do JIBAR deals?  If so, is there anything I need to be aware of? Yes, you can still do JIBAR linked deals. The legal agreement will have fallback language embedded to deal with the scenario of the rate ceasing to exist.
5 What is Fallback language / rate? Fallback language refers to the contractual provisions that lay out the process, replacement rate and credit spread adjustment through which a replacement rate can be identified to align to a benchmark (e.g. JIBAR) that becomes unavailable.

Benchmark fallbacks are replacement rates that would apply to transactions referencing a benchmark. The benchmark fallback will take effect if the relevant benchmark becomes unavailable while market participants continue to have exposure to that rate.
6 What happens if my loan matures after cessation? In this event, Absa will contact you to amend the document and replace the JIBAR rate with a suitable alternative reference rate (likely ZARONIA).  If applicable, an appropriate credit adjustment margin will be made to cater for the differences between the old rate and the new alternative rate such that the contract remains economically equivalent.
7 What is a credit spread adjustment? The spread adjustment reflects the structural differences between interbank offered rates (in this case, JIBAR) and the risk-free rates (in this case, ZARONIA).

 

 

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