This blog was co-authored by Eric Geldenhuys, candidate attorney at Norton Rose Fulbright South Africa
The proposed 2026 rate switch in South Africa from JIBAR to ZARONIA will have an impact on all cash transactions which previously applied JIBAR, as well as all JIBAR-linked transactions. ZARONIA is a daily risk free rate, unlike JIBAR which is an estimated forward looking rate, and requires a more hands on approach. Across international markets, and in South Africa, there are different recommended conventions which apply to the application and calculation of an RFR based contract.
The agreed loan contractual interest period would typically be a 1, 3, 6 or 12-month period.
A problem that required a solution is that ZARONIA is a backward-looking daily rate which means that the interest rate for a particular Business Day will only be known on the following Business Day. This introduced a delay because an interest amount cannot be calculated until a day after the interest payment due date.
A ‘lookback’ approach solves this issue by ‘looking back’ 5 Business Days into the past. This 5 Business Day ‘look back’ is known in the Loan Market Association (LMA) loan documents as the Lookback Period. The choice of a 5 Business Day ‘lookback’ is the MPG and LMA recommended convention. The effect of the Lookback Period is that the rate published 5 Business Days earlier than the current Business Day calculation date is used as the rate which applies to that current Business Day.
Because of the Lookback Period, the whole duration of the contractually agreed loan interest period (Interest Period) is moved or ‘shifted’ back 5 Business Days and becomes known as the Observation Period. The Observation Period starts 5 Business Days before the start of the Interest Period and will end 5 Business Days before the end of the Interest Period. This is depicted in the diagram below, described as “The Solution – Lookback Period” diagram. The observed rates during the Observation Period are used to calculate the applicable rate that will be applied on the last day of the Interest Period.
The Lookback Period solves the problem of a borrower potentially having to pay an amount of interest on the same day as being notified of the amount due. We ‘look back’ to the past with five Business Days and apply the rate published 5 Business Days earlier as the rate for the current Business Day.
The Lookback Period concept creates the basis for the Observation Period. We ‘look back’ into the Observation Period which contains all the Business Days from the Interest Period each minus five Banking Days. The Observation Period therefore starts 5 Business Days before the start of the Interest Period and ends 5 Business Days before the end of the Interest Period eliminating any calculation delay on the last day of the interest period.