This blog was authored by Rory Scott, Candidate Attorney.
In recent years, financial markets globally have been implementing the reform of reference interest rates to Risk-free Reference Rates (RFRs). South Africa, following suit, is progressing towards replacing the Johannesburg Interbank Average Rate (JIBAR) with the preferred successor rate of the Market Practitioners Group’s (MPG), most likely being the South African Overnight Index Average (ZARONIA). The SARB is the administrator of JIBAR and will be the administrator of ZARONIA.
JIBAR is a representation of the short-term interest rate (money market rate) that is used in South Africa. It is forward looking and uses indicative rates. On the other hand, ZARONIA is a financial measure of the interest rate at which rand-denominated overnight wholesale funds are acquired by commercial banks in South Africa, based on historical transactions.
ZARONIA is backward-looking, is based on the transactions that are reported daily to the South African Reserve Bank (SARB) and the credit, liquidity and additional risks are minimal. On each business day in South Africa at 10:00, the headline rate is published on the SARB website. The calculation methodology of ZARONIA is specified as the trimmed, volume-weighted mean of the central 80% of the distribution of interest rates paid on eligible unsecured overnight deposits.
A key reason behind the reform and transition of reference rates, from JIBAR to ZARONIA, is because it has been evidenced that JIBAR does not reflect the cost at which banks fund themselves in the market anymore. The Financial Stability Board (FSB) conducted a review of JIBAR, and the results indicated concerns regarding the reliability of specific benchmark interbank offered rates (IBORs). Furthermore, it is uncertain whether the IBORs still represent the interest rates that they claim to measure, seeing that there was a large decline of unsecured funding market activity reinforcing them.
In addition, ZARONIA has appeared to adjust well to changes to the repo rate, and such responsiveness of ZARONIA to changes in the policy rate is desirable because it suggests that it will be effective in transmitting monetary policy.
To ensure that ZARONIA is reliable, robust, and sufficiently stable as the succeeding reference rate replacing JIBAR, it was deemed to be of utmost importance that the design of ZARONIA be rigorously tested. This was done over a period of five years in which the SARB collected historical transactions data from the largest commercial banks and the JSE Limited. The back-testing results were positive, evidencing that the contingency and substitute rate of ZARONIA are fit for purpose, yielding positive rates closely following the benchmark rate levels in terms of both magnitude and direction.
The transition from JIBAR to ZARONIA in South Africa is on the horizon for 2025 and all market participants are urged to follow the progress of the transition from JIBAR to ZARONIA (both through the publication of the daily rate and historical back-testing results) to place themselves in the best possible position for when the cessation of JIBAR officially occurs and ZARONIA becomes the standard of the market.