What is JIBAR?

Other designated rates that may be ceasing:

SABOR (South African Benchmark Overnight Rate) is calculated and published by the SARB daily. The overnight deposits for the top 20 clients of each bank is submitted and accounts for 95% of the rate, while the other 5% is attributed to the interest rate in Foreign Currency (FX) swaps.

The SAFEX (South African Futures Exchange) Bank Bill rate was started in the 1990s. It is the weighted average rate received from banks for the margins and default fund contributions placed by the Johannesburg Stock Exchange (JSE) with high credit quality local commercial banks (not more than 30% with a single institution).

STeFI (Alexander Forbes Short-Term Fixed Interest Index) is a recognised benchmark of the returns earned in the South African money market.

Why does JIBAR need to be replaced?

During 2012 the London Interbank Offer Rate (LIBOR) scandal broke which provided evidence of widespread collusion by several financial institutions to manipulate the rate to these banks' benefit. The earliest evidence of manipulation goes as far back as the early-2000s. Suspicions were raised during the global financial crisis when banks seemed to borrow funds at rates lower than would be expected in a time of crisis, giving a distorted impression of these banks’ financial stability. All of this revealed the vulnerabilities of the LIBOR benchmark rates and signalled the beginning of the benchmark reform globally.

In response, the Prudential Authority (PA) released a paper in 2018, detailing their proposal to transform the interest rate benchmarks and reference rates in South Africa. JIBAR was signalled as the most systemic interest rate in domestic markets that needed to be reformed as it didn’t meet the criteria for a reference rate set by international bodies. The PA then formed the Market Practitioners Group (MPG) consisting of stakeholders from different segments of the market to deal with South Africa’s rates reform.

The underlying market that JIBAR is derived from is no longer used in any significant volume. Therefore, the submissions made by banks to sustain the JIBAR rate are often based (at least in part) on expert judgement, rather than actual transactions. SABOR, SAFEX and STeFI have been identified as not being IOSCO (International Organization of Securities Commissions) compliant and may face the same remediation as JIBAR.

What are Alternative Reference Rates (ARRs)?

Working groups from around the world have proposed Alternative Reference Rates (ARRs) to replace reference rates. In the interim, JIBAR has been strengthened via the JIBAR Code of Conduct (Jibar: Code of Conduct, Governance Process and Operating Rules - July 2024 (resbank.co.za).

The ARR that has been recommended by the SARB as an alternative to JIBAR, is ZARONIA (South African Overnight Index Average).

ZARONIA is administered by the SARB and is a benchmark that reflects the interest rate (unsecured) at which overnight wholesale funds are traded by banks in Rand (https://www.resbank.co.za/en/home/what-we-do/financial-markets/south-african-overnight-index-average).

What are the differences between JIBAR and ARRs?

ARRs differ structurally to JIBAR rates. JIBAR is a forward-looking term rate, which means that the JIBAR rate for an interest period or calculation period is set at the start of that period, with payment due at the end. As such, it provides certainty of funding costs to assist in cashflow management. Also, JIBAR embeds a credit premium (it implies bank credit risk) and a liquidity premium (it includes a premium for longer dated funds).

In contrast, the nominated ARRs are backward-looking overnight rates. They are designed to be near risk-free, with no premium for term. These differences have implications for how interest and other payments based on the ARR may be calculated relative to JIBAR based transactions and products.

The transition of existing JIBAR based contracts to contracts referencing ARRs may involve the payment of a spread adjustment also known as the Credit Adjustment Spread (CAS) and may impact the operation of certain financial covenants. There may also be cashflow and hedge accounting impacts if a mismatch arises on the transition between a loan and a related derivative.