Rand rate reform

The industry often uses widely known interest rates to price, value and measure the performance of financial securities across various markets, including equity, credit, commodity, fixed income, and foreign exchange (FX) markets. These rates are commonly characterised as reference rates as they are often referenced in financial contracts. Some of these rates are determined solely by credible institutions, such as the policy rates of central banks, while others combine inputs from numerous contributors to form indices that are commonly referred to as benchmark rates. Essentially, reference rates tend to reflect wider market conditions, assist in price discovery, and reduce information asymmetry.

Certain benchmark rates are deemed critical as they underpin the pricing of a large volume of financial contracts worth trillions of rands and are used to measure the performance of large investment funds. Consequently, they are deeply embedded in the global financial system and play an important role in the functioning of modern financial markets. Examples of such critical benchmarks include the Secured Overnight Financing Rate (SOFR) and the Johannesburg Interbank Average Rate (JIBAR), which are widely referenced in financial instruments within the South African financial market.

The Johannesburg Interbank Average Rate, known as JIBAR, is one of the most widely used interest rate benchmarks in South Africa. The South African Reserve Bank (SARB) is the administrator of JIBAR, which is widely used as a reference rate that underpins a significant number of financial contracts and valuations. It is the published in as 1, 3, 6, 9 and 12-month tenors. The 3-month JIBAR rate is the most widely used. The JIBAR benchmarks are calculated using certain South African bank quoted Negotiable Certificates of Deposits rates as the inputs to determine JIBAR for each tenor.

In 2012, the news broke that several major banks had been manipulating the London Interbank Offered Rate (LIBOR), a benchmark interest rate that was used to set the prices of financial instruments worth trillions of dollars. The investigation into the LIBOR scandal was led by financial regulators in the US and the UK, and it involved the participation of key players such as Barclays, UBS, and Royal Bank of Scotland. The investigation found that the banks had been submitting false information about their borrowing costs in order to manipulate the LIBOR rate. This allowed the banks to profit from trades based on the artificially low or high LIBOR rates. The investigation also revealed that the banks had colluded with each other to manipulate the LIBOR rate. The LIBOR scandal had broader consequences for the financial industry and investor trust. The revelation that major banks had been manipulating a key benchmark rate shook investor confidence and led to a decline in the stock market. The scandal also led to a renewed focus on the need for stronger regulation and oversight of the financial industry.

In recent years, financial markets globally have been implementing the reform of reference interest rates to Risk-free Reference Rates (RFRs). South Africa as a G20 member is following the global approach adopted by the G20 Financial Stability Board of reviewing and amending interest benchmarks to comply with global standards on interest rate benchmarks (as set by IOSCO). Through this review conducted by SARB, JIBAR is seen as not meeting all the required attributes of an interest rate benchmark as determined by IOSCO. One of the key factors and similar to Libor, is that JIBAR does not have a significant volume of transactions underpinning the calculation of the rate. Having an internationally credible benchmark will support financial stability in South Africa.

It is currently expected that JIBAR will no longer be published beyond the end of 2026. This will mean that all contracts with JIBAR fixings beyond the cessation date will be impacted and may need to rely on contractual fallback provisions. These transactions may require transitioning to an alternative reference rate and/or make provision for the use of an appropriate fallback rate. Contracts entered into after the announcement of the cessation date, which mature after the cessation date, will need to reference an alternative rate, preferably the designated successor rate (ZARONIA). Following the timelines currently disclosed by SARB, it is proposed that the cessation date will only be announced at the end of 2025 with the expectation that JIBAR will cease to exist in 2026.

The SARB put in place a Market Practitioners Group (MPG), incorporating public and private sector members to manage the Interest Rate Benchmark Reform programme in South Africa. The SARB are overseeing the JIBAR Reform process by collaborating with the various industry bodies, including trade associations, financial services firms, public sector entities to map the reference rate reform journey, ensure appropriate communication with the market and facilitate the execution of key deliverables.

The Prudential Authority and Financial Services Conduct Authority will monitor financial institutions progress on transition away from JIBAR, ahead of the cessation date, through a supervisory programme.

The transition process from JIBAR to ZARONIA or any other reference rates (e.g. Prime) is expected to impact both existing and future transactions. Existing transactions maturing after the cessation date will undergo a transition process which will include contract amendments to cater for the transition from JIBAR to ZARONIA. Future transactions, entered into prior to the cessation date, will need to be documented based on the understanding that JIBAR will transition to ZARONIA on cessation date e.g. the inclusion of fallback language or the inclusion of the ZARONIA rate, depending on readiness and/or the regulator’s milestones. Transactions entered into after the cessation date, will adopt the new ZARONIA rate. Any product using JIBAR as a reference rate will be impacted, these include derivatives, bonds, loans, deposits, structured products, including certain JIBAR-linked home loan products.

Creating a robust overnight benchmark will improve the financial stability conditions for South Africa. Standard Bank is actively involved in the work of the MPG through leading and participating in relevant workstreams of the MPG. This ensures that we are actively contributing to industry developments and are able to closely monitor progress with regards to derivative and cash market milestones, governance and regulatory guidelines, legal impacts, market infrastructure requirements to support this reform and various other components. The Bank has set up an internal programme to facilitate the transition process across our Business Units and work closely with our clients on this reform journey.

The MPG Timeline can be viewed in three phases - Foundation, Adoption and Transition phase. The Foundation phase was concluded end of 2023 with the Adoption phase focussing on the various elements required to facilitate the uptake of new ZARONIA trades in the market. Two key milestones to be aware of, are the Derivatives and Cash/Money Market 1st Initiatives in February and June 2025 respectively.

The Transition phase kicks off with the formal announcement on JIBAR cessation, expected in Q4 2025 followed by final publication of JIBAR (or JIBAR cessation) at the end of 2026 as depicted in the latest Industry Timelines.

Standard Bank is continually assessing our client’s impacted JIBAR transactions against the MPG transition timelines, as well as market developments to facilitate transition away from JIBAR. Any impacted contracts will be identified, reviewed and where necessary, amended to include the appropriate fallback language prior to cessation date, or actively transitioned to ZARONIA, the successor rate for JIBAR.

The bank will contact affected clients in due course through our client management teams. We encourage our clients to undertake a similar analysis and review exercise, and to take appropriate independent professional advice (legal, tax, accounting, financial or other) so that they can understand the impact of the discontinuation of JIBAR or other reference rates on their portfolios.

Standard Bank will follow industry standards on transitioning transactions away from JIBAR which are designed to ensure a fair transition. Differences between JIBAR and ZARONIA can give rise to transfer in economic value between counterparties when transitioning legal JIBAR financial instruments. This difference is as a result of ZARONIA being a near risk free rate which does not credit risk risk premium incorporated in JIBAR.

The SARB MPG has set up a Credit Adjustment Spread workstream which has been tasked with developing a credit adjustment spread. The credit adjustment spread aims to mitigate against the risk of transferring economic value when transitioning from JIBAR legacy contracts to ZARONIA. Please contact your client coordinator to assist with questions and guidance with regards to next steps or for more information.

If you have JIBAR impacted contracts, we recommend that you seek independent professional advice (legal, tax, accounting, financial or other). The change involves a legal change which will need to be concluded between you and Standard Bank. Some of the steps might be the amendment of your contracts, either bilaterally or by participating in a market initiative (for example application of the ISDA fallback protocols, if you have signed up with ISDA).

We recommend that clients begin to put in place a comprehensive transition planning process which aims to ensure a smooth transition away from JIBAR to ZARONIA linked contracts. The plans need to consider the following:

• Undertaking an impact assessment of current exposures to JIBAR and working collaborating with financial institutions, industry bodies and other key stakeholders
• Reviewing legal agreements and potential renegotiation of certain legal terms to include fallback provisions.
• Ensuring that systems are updated, and processes are in place to manage ZARONIA exposures

Standard Bank will continue to provide updates on industry developments via its website, webinar, emails and forum discussions. We encourage our clients to monitor the Standard Bank, SARB, and other industry bodies publications and touch base with their client coordinators.

The occurrence of an event/s that would result in the future cessation of an existing reference rate. (For example: the announcement by the regulator or administrator of the permanent discontinuation of an existing rate or potentially but an unlikely scenario where the regulator determine that an existing reference rate is no longer representative).

The announcement of the JIBAR cessation date, earmarked for December 2025, will be a trigger event. This will result in the Credit Adjustment Spread between JIBAR and ZARONIA to be fixed. This will provide certainty to the market on the exact impact of the transition between JIBAR and ZARONIA for existing transactions. Once finalised Credit Adjustment Spreads will be published to the market for use, but will fix on the trigger event date.

Fallback language refers to the contractual legal terms that would apply should a reference rate no longer be published (e.g. JIBAR, post cessation of JIBAR). The discontinuation of a benchmark rate, such as JIBAR, will have an impact on contracts where inadequate fallback language is in place. Entities can address this risk by including language in their contracts which references a replacement rate, such as ZARONIA, that will automatically become effective and replace the discontinued rate upon a particular agreed date or the occurrence of a trigger event, such as the date of discontinuation. This is known as fallback language and is considered to be a “safety net” or “safety belt” as parties automatically transition to the replacement rate specified in the fallback language.

It is encouraged to include robust fallback language in contracts, which includes the appropriate replacement rate. This would limit the possibility of either party to a contract suffering economic prejudice post transition. Certain international associations, such as ISDA (for the derivative market) and the LMA (the loan market) have published standardised fallback language for benchmark rates, such as LIBORs, that have discontinued. The fallback language assisted with a smooth and effective transition from LIBOR to the relevant replacement rates. These associations have also been engaged to assist with the JIBAR/ZARONIA transition.

The definitions for ZARONIA have been added into the 2023 ISDA Definitions. The ISDA fallback language protocol is earmarked to be published in November 2024 according to the latest MGP timeline. ISDA is involved in the MPG Legal workstream and is in the process of reviewing the various South African based requirements in order to determine the appropriate JIBAR fallback language.

The SARB MPG are still to announce whether SAFEX O/N will continue to be an eligible benchmark for use, however it is not clear it meets all the IOSCO principles for an interest rate benchmark.

Standard Bank is in the process of defining its transition strategy based on internal governance and industry developments. Legacy contracts are contracts that reference JIBAR and are entered into prior to the date that JIBAR is permanently discontinued (i.e. the permanent cessation of JIBAR), and which mature or terminate after such cessation date. Such contracts must be amended to incorporate suitable fallback language or other appropriate language to cater for the transition from JIBAR to ZARONIA prior or by the cessation date. For example: (i) In respect of derivatives, the ISDA fallback protocol will apply if both parties sign-up to such protocol on the ISDA website once it is published; and (ii) for loans or deposits referencing JIBAR, agreements will need to be amended, as required.

A credit adjustment spread is a method to compensate for the difference between JIBAR and ZARONIA; the built-in credit and term premium present in JIBAR but not ZARONIA. The MPG is determining spreads that allow for transition from the use of JIBAR to ZARONIA. Credit Adjustment Spreads are not designed to provide full economic compensation but a fair approach to facilitate transition to ZARONIA.

Term rates (like JIBAR) are useful as they provide cash flow certainty at the beginning on an interest period. ZARONIA is an overnight rate which makes determining interest for a specific interest period more complex, requiring daily observation of the overnight rate, or reliance on a published (backward looking) index. In certain international markets, term rates have been derived from derivative markets, referencing new alternative reference rates. The MPG are working on determining the feasibility of a term rate in South Africa that could meet the IOSCO principles for interest rate benchmarks. It is unclear that term rates will be available prior to cessation of JIBAR and clients should not rely on a term rate being available, at this point in time.