Preparing for the big benchmark shift

In line with global benchmark reforms, South Africa is replacing JIBAR with ZARONIA as its primary reference rate. The South African Reserve Bank (SARB), in collaboration with the Market Practitioners Group (MPG), has designated ZARONIA as JIBAR’s successor to enhance reliability and transparency in financial markets.

With JIBAR set to be phased out by the end of 2026, the transition will affect various financial transactions, making early preparation essential for market participants.

As an asset manager overseeing JIBAR-linked investments, we are actively aligning client portfolios with the rate reform. By participating in key workstreams and implementing necessary system changes, we aim to ensure a smooth transition with minimal impact on client positions.

The transition from JIBAR to ZARONIA - what does this mean?

In 2013, following concerns about the integrity and reliability of certain market benchmarks, the International Organisation of Securities Commissions (IOSCO) released a list of requirements for market benchmark rates. A number of jurisdictions convened working groups to review their respective interbank offered rates’ (IBORs’) benchmarks. Most working groups recommended that the IBOR rates be discontinued and replaced with more robust transaction based, risk-free or near risk-free rates. 

South Africa, being a member of IOSCO, followed the international initiative. The South African Reserve Bank (SARB) initiated the domestic project to reform the Johannesburg Interbank Average Rate (JIBAR), the most widely used reference rate in South Africa, to the South African Overnight Index Average (ZARONIA). The Market Practitioners Group (MPG) - a joint public and private sector group established by the SARB to drive the reference rate reform programme in South Africa - designated the ZARONIA as the preferred successor rate to replace the JIBAR. 

JIBAR is expected to be phased out by the end of 2026. The transition is expected to impact existing and future transactions across contract types and client segments. 

What is the expected impact on our clients’ portfolios? 

New transactions linked to ZARONIA will be added to the portfolios under management over time. We expect that these will be priced relative to ZARONIA + Credit Adjustment Spread + Counterparty Credit Spread pre-cessation, and that post cessation the market will find new parity. The overall level of return of new ZARONIA-linked floating rate assets will be like previous JIBAR-linked floating rate assets. There will be minimal performance impact on client portfolios during the transition. This is due to exposures being transitioned to affect the same economic value as the old transactions’ terms.  

ZARONIA is a benchmark rate that reflects the interest rate at which rand-denominated overnight wholesale funds are traded. ZARONIA is more reactive to monetary policy action compared to 3-month JIBAR, as can be seen in Figure 1 below. 

Figure 1: Market benchmark rate comparison 

Source: SARB/INET

Figure 2: Finding a STeFI benchmark replacement

The chart below compares the current STeFI composite benchmark to an index based off the ZARONIA rate. In general, the ZARONIA index responds more immediately to monetary policy action.

Source: Futuregrowth Asset Management

How does ZARONIA differ from JIBAR?

The key difference between these rates is embedded in their calculation methodologies. JIBAR is forward looking and relies on submissions of indicative pricing from a selected panel of banks. In contrast, ZARONIA is backward looking and reflects actual, sizeable, observable transactions, and is considered more credible and robust.

The main differences are summarised in Figure 3 below.

Figure 3: Differences between ZARONIA and JIBAR

Source: MPG presentation on 19 April 2023

Key impacts of the switch

1.        The new rates are overnight backward-looking rates, aligned to the IOSCO principles. Overnight rates will have no impact on the future issuance of debt instruments.

2.       ZARONIA will always have a publication lag of one business day since traded data is used to construct the rate.

3.       Several practical issues will prevent the availability of transaction-based, term, risk-free or near risk free rates in the medium term. Once the market for ZARONIA rates stabilises and becomes liquid, the market might move towards introducing standalone term rates, but that is not a priority in terms of the transition plan.

4.      STeFI benchmark calculations will change (Futuregrowth is currently looking at alternative benchmarks).

5.       Systems will need to be updated to accept the new rate, and there will be both accounting and tax implications for the transition from the existing JIBAR exposure.

6.      Legal contracts and agreements will need to be changed/updated to reflect the new reference rate.

Key dates

Below is an illustration of the MPG transition plan and milestones to date. We await clarity on the Credit Adjustment Spread (CAS) (historic JIBAR vs ZARONIA). This will likely land on a 5-year lookback median and will be published via official publications from the South African Reserve Bank (SARB) and on Bloomberg.

The "ZARONIA-first" initiative for derivatives refers to a phased initiative for switching trading conventions from JIBAR to ZARONIA. Types of ZARONIA-first linear derivatives include Interest Rate Swaps, Futures and Cross-Currency Swaps.

ZARONIA first for linear derivatives is expected to be initiated in April 2025, and other derivative types are expected to follow thereafter. A phased implementation approach is likely for sub-sets of the market (such as cash markets) as opposed to a single implementation date.

Figure 4: ZARONIA timeline

Source: SARB/Standard Bank; MPG Transition Workstream

What is Futuregrowth's involvement?

As asset managers overseeing client assets that include exposure to JIBAR-linked securities, we are actively involved in aligning our clients’ assets to the reference rate reform initiative put forward by the SARB. We are proactively working alongside the MPG (by actively serving on some of the workstreams) in implementing the required guidance to agreements and contracts that are impacted by this industry change. We are also pre-empting systems changes and have started implementing these.

How are we positioning ourselves while making sure we onboard this change successfully?

Where existing agreements mature or are closed out prior to the JIBAR cessation date, these investments will remain unaffected. Futuregrowth will focus on being operationally ready to trade new ZARONIA-linked securities when suitable liquidity in the market is made available. All JIBAR-linked securities still in effect post the JIBAR cessation date will be transitioned to ZARONIA-rate equivalents with a CAS that places the investor in materially the same economic position as if the JIBAR rate was still in effect.

Legals and agreements

We will start adding fallback language to new contracts. This will include a conversion spread to create equivalence between JIBAR and ZARONIA reference rates, which will be governed by industry standards (e.g., ISDA) and coordinated via the MPG.

Existing contracts will be converted (without any economic impact) through a credit adjustment spread. Futuregrowth unlisted debt trades might require re-contracting with borrowers. Tough legacy contracts might require a “sample JIBAR rate” to be published post cessation or a refinance of the entire transaction.

Upon conclusion of a replacement benchmark for the STeFI, we will need to recontract with regards to client Investment Mandates with benchmarks or other references to STeFI indices or JIBAR rates. This will likely only happen once the CAS is confirmed upon the announcement of JIBAR cessation.

Changes to our systems and technology

Operational changes to our systems are required to cater for the new backward-looking daily compounding ZARONIA rate. We are working alongside all our key vendors to ensure the timeous adoption of ZARONIA and to ensure minimal impact on client positions during and post the transition.

To date, the ZARONIA rate has been deployed to our Infostore and CRIMS systems. We have received confirmation from the FSCA that they are working on an exemption related to the Collective Investment Scheme’s Board Notice 90 (BN90) for ZARONIA-linked securities for money market funds. This will mitigate the need for a regulatory change that could materially delay the implementation of ZARONIA.

Ongoing communication

We will inform you of any new developments and keep you updated on our progress as we go along.

Please let us know if you wish to discuss this move and its implications in more detail, or have any specific questions at this time, and we will be happy to engage with you.