Replacing Jibar with Zaronia

Reforms to SA’s reference interest rate are accelerating rapidly, with significant progress towards replacing the long-established Johannesburg interbank average rate (Jibar) with the new SA overnight index average (Zaronia) rate.  

The Reserve Bank made it clear at an April 19 conference that it would like to see the switch to Zaronia happen as fast as possible. With the new rate now halfway through its intended observation period, data shows that the new Zaronia is behaving exactly as it should — opening the way for SA to just get on with it.  

The Jibar is now the key money market reference rate and is supposed to represent banks’ cost of borrowing for maturities of up to 12 months. It underpins the rate at which banks can lend to their customers, and so has a wider effect on corporate borrowing and on the economy.

It is the most widely used reference rate in financial contracts, with the Reserve Bank estimating that the financial value of outstanding contracts referencing the three-month Jibar exceeds R340.6-trillion. Such contracts include derivatives such as interest rate swaps as well as bonds and other loans used by financial sector institutions and other professional users such as large corporate treasuries.  

SA’s interest rate reforms are in line with a global effort to reform the reference interest rate that began a decade ago after the global financial crisis when the major markets embarked on modernising their interbank offer rates, such as the Libor (originally the London interbank offer rate).  

SA began its rate reform process with the publication of a consultation paper in August 2018, and after working with a market practitioners group on a more detailed plan the Bank started publishing a daily beta version of the new Zaronia in August 2022, before beginning with the one-year observation period in November. Decisions about key dates for the next steps will be made only after the observation process ends on October 31. 

Become comfortable

The switch from Jibar to Zaronia is a three-phase approach. Provisional timelines suggest Zaronia will be available for use in the derivatives market before end-2023, and for use in the cash markets, including bonds and loans, by mid-2024.

The plan allows a year for derivative market participants to become comfortable with the use of the new rate before “Zaronia first” becomes the norm in the derivatives market. This should allow for a build-up of liquidity in the derivatives market, which is required before the new rate becomes the norm in the cash market.

The key milestones will be when new derivative contracts no longer reference Jibar, and then when the cash market starts referencing Zaronia. June 2025 is the target date for moving to a “no new Jibar” contracts norm in the SA market. 

Like its international counterparts, Jibar’s shortcoming is that it no longer reflects the cost at which banks fund themselves in the market, especially in the key three-month tenor. It is an indicative rate displayed by five contributing banks: not many deals are done at three-month Jibar.

In contrast, Zaronia captures the rates on 95% of overnight deposits. It draws on a wide data set of 10 contributing banks with a multitude of clients. And it reflects the rate at which transactions were actually settled. Another important difference is that Jibar is forward-looking, whereas Zaronia is based on historical transactions and calculated in arrears. 

Since the observation period started, the spread between Zaronia and the repo (policy) rate has been -15.8 basis points (bps), with 9bps at its narrowest and 23bps at its widest. The unsecured overnight transaction volume on which Zaronia’s daily calculation is based averaged R361bn, with a R185bn-R514bn range. Halfway through the observation period, the new rate appears to meet the requirements for a replacement key reference rate. 

Much work

The market practitioners group is finalising the methodology for transitioning Jibar-linked contracts, which will require adjustment spreads to be calculated for each tenor. To operate, a derivatives market requires that a set of conventions be adopted. The group’s derivatives working group published a white paper proposing market conventions for derivative products that use Zaronia. A revised version is due shortly. 

The development of common conventions for the cash market is still a work in progress, with white papers for each of the bond and the loan markets expected before end-June. The working group has outlined the design principles for the cash market, but much work remains to be done. 

The transition will have wide-ranging consequences across SA’s financial system and could be disruptive. In the real economy, contracts linked to Jibar or prime will be switched to compounded-in-arrears Zaronia rates. In the financial markets the pricing of all debt securities and various types of interest rate derivative contracts will change to the new reference rate. The benchmarks against which investment performance is measured will have to be revised, particularly in the money market. Changing investment mandates is a process that in practice tends to take far longer than expected. 

Caution will need to be applied as the market transitions to the use of Zaronia as a reference rate in financial contracts — especially since such financial contracts span wider than the banking sector, affecting the stability and efficiency of the entire financial system. Consistency across loans, securities and hedging instruments is critical. 

The draft transition plan has ambitiously short timelines, given the operational and system changes that all market participants will have to implement. Even after new contracts shift to Zaronia, a transition process for legacy contracts will have to be managed and suitable fallback provisions inserted in existing contracts well in advance of Jibar’s cessation date.

The next two years will be critical. But as Reserve Bank deputy governor Rashad Cassim made clear at the recent conference: “The exact date for the discontinuation of Jibar will be determined and communicated soon after Zaronia becomes available for use; however, the Bank’s preference is for the transition period to be less than the five years it took for the Libor transition.” 

Ilkova is markets strategist and Silberman fixed-income & currency analyst at Rand Merchant Bank.