This blog was co-authored by Eric Geldenhuys, candidate attorney at Norton Rose Fulbright South Africa
Markets globally have transitioned from USD LIBOR to the Secured Overnight Financing Rate (SOFR) and from British Pound Sterling LIBOR to the Sterling Overnight Index Average (SONIA). Following the global markets, South Africa is transitioning from JIBAR to the South African Overnight Index Average rate (ZARONIA). The end of 2026 is marked as the potential cessation of the Johannesburg Interbank Average Rate (JIBAR) which will be replaced by ZARONIA. In this blog series we cover the timeline of the transition, the differences between JIBAR and ZARONIA, the components of ZARONIA such as Observation Shift and the Lookback Period, and the credit adjustment margin.
The transition timeline – what do you need to know?
The Market Practitioners Group (MPG) published an update on the transition from JIBAR to ZARONIA. The JIBAR cessation announcement will likely come in 2025 followed by the formal cessation date at the end of 2026. The MPG’s transition plan is divided into ‘three pillars’, the adoption of the new benchmark in derivatives markets for new contracts, cash markets for new contracts, and the transition of legacy JIBAR positions.
The MPG has recommended that market participants take an active approach in this impending transition of loan and other contracts away from JIBAR legacy positions and cautions that these should be addressed earlier rather than later. An early active approach reduces the risks and exposure of a disorderly transition and mitigates the risk of a failure of that contract. The inclusion of appropriate fallback provisions will assist the parties to that contract in reaching an agreed position with which to continue the contract and will provide business certainty.
From JIBAR to ZARONIA – What are the differences?
JIBAR is a forward-looking estimated benchmark. JIBAR is quoted based on bank estimates for a 1, 3, 6 or 12-month period looking forward, which reflect the estimated wholesale rate at which a bank in the South African market would lend to another bank in that same market. ZARONIA on the other hand, is a backward-looking overnight deposit rate, known as a Risk-Free Rate (RFR), which is calculated daily, and the rate used is based on actual transaction data.
A key difference is that JIBAR has an in-built credit element, which accounts for the premium for term liquidity or bank risk while daily ZARONIA does not. It is expected that the ZARONIA based daily rate will be lower than the JIBAR for the quoted tenor. Therefore, on or during transition, economic neutrality is preserved by the addition of a credit adjustment spread to the daily ZARONIA rate, to ensure that pre and post transition, parties remain in the same economic position.
The South African convention, for the application of ZARONIA, following the MPG’s recommended convention, is the Daily Non-Cumulative Compounded Rate, applying a ‘Lookback without Observation Shift’. We will address these concepts in the further blogs in this series.
We have previously published blogs on the transition from JIBAR to ZARONIA, which you can find here:
(1) South Africa’s Transition from JIBAR to ZARONIA | Financial Institutions Legal Snapshot
(2) The decline of LIBOR and the new risk-free interest rates | Financial Institutions Legal Snapshot]