Since the discontinuation of the London Interbank Offer Rate (LIBOR), the Johannesburg Interbank Average Rate (JIBAR) has been the primary benchmark for the South African money market, representing the cost of bank borrowings for maturities up to 12 months. JIBAR has been widely used in financial contracts, including derivatives, bonds, and loans. However, following the Global Financial Crisis and subsequent reforms in major markets to improve the reliability and robustness of interbank offered rates, South Africa has also embarked on a reform process to replace JIBAR with the South African Overnight Index Average (ZARONIA).
In August 2018, the South African Reserve Bank (SARB) initiated the interbank rate reform process in collaboration with the Market Practitioners Group, which includes various industry stakeholders. This group published a consultation paper outlining the plan to replace the JIBAR with ZARONIA). This new benchmark aims to provide a more accurate reflection of the true cost at which banks fund themselves, based on actual overnight deposit rates.
Global Interbank Offered Rates (IBORs) Reform
In the early 1980s, a global initiative began to create standardized benchmark rates to aid in the pricing of financial instruments. By 1986, the London Interbank Offered Rate (LIBOR) had become the dominant benchmark, representing the rate at which banks could borrow from each other. However, the need for reform emerged due to manipulation scandals and the quest for more reliable benchmarks.
In 2012, investigations revealed that major international banks were manipulating LIBOR to benefit their trading positions and project financial stability, undermining its credibility. This manipulation was possible because LIBOR was based on estimates from a small number of banks rather than actual transaction data, making it vulnerable to distortion and less reflective of real market conditions.
The Global Financial Crisis of 2008-2009 further exposed significant weaknesses in financial benchmarks, underscoring the necessity for transparent, reliable, and resilient systems. As a result, central banks and financial regulators worldwide initiated comprehensive reforms to interbank offered rates. The aim was to establish benchmarks grounded in actual transaction data to enhance governance, oversight, and reliability under varying market conditions. The objective was to replace existing benchmarks with risk-free or nearly risk-free rates.
Notable outcomes of these reforms include the replacement of LIBOR with the Sterling Overnight Index Average (SONIA) in the United Kingdom and the Secured Overnight Financing Rate (SOFR) in the United States. These new benchmarks are based on actual transactions, making them more robust and reflective of true market conditions, thereby restoring trust in financial benchmarks.
The Transition from JIBAR to ZARONIA
In South Africa, JIBAR has been a key benchmark interest rate, but it has been criticized for not accurately reflecting the true cost at which banks fund themselves. The South African Reserve Bank (SARB), along with the Market Practitioners Group (MPG), has been working on transitioning to ZARONIA, which captures the rates on 95% of overnight deposits from a wide data set of contributing banks. Unlike JIBAR, which is forward-looking, ZARONIA is based on historical transactions and calculated in arrears.
Since November 2023, the SARB has been publishing ZARONIA rates on its website (www.resbank.co.za) (www.resbank.co.za/en/home/what-we-do/financial-markets/south-african-overnight-index-average).
The foundation stage, completed in 2023, included the endorsement of ZARONIA and initial market engagement. The adoption stage began in January 2024 with market communication about the future cessation of JIBAR. By the fourth quarter of 2024, ZARONIA is expected to be used in the derivatives market, with full transition across all markets by the first quarter of 2026. (see figure 1 below).
Figure 1: Draft ZARONIA Timelines
Source: Transition plan MPG April 2023.pdf (resbank.co.za)
The transition from JIBAR to ZARONIA is not without pitfalls
The transition from JIBAR to ZARONIA is ambitious, with SARB aiming for a timeline shorter than the five years taken for LIBOR’s replacement. However, this rapid transition poses potential challenges, including possible disruption of contracts linked to JIBAR and the need for consistency across financial and non-financial sectors. Changing investment mandates and ensuring smooth integration across all financial instruments will be critical.
Conclusion
Despite the challenges, the transition to ZARONIA is a progressive step in line with international best practices. Supported by principles from the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), ZARONIA aims to provide a more transparent, reliable, and resilient benchmark for the South African money market.
For more detailed information, visit the South African Reserve Bank website.
