Dain Winsnes, Fixed Income Portfolio Manager and Quantitative Analyst at Matrix Fund Managers

South African financial markets are undergoing a rare monumental shift with very few people – even some participants in the financial industry – aware that it is happening in 2025 and 2026. Jibar (the Johannesburg Interbank Rate), an average three-month negotiable rate, is being replaced with Zaronia (the South African Rand Overnight Index Average), an overnight deposit rate, with large ramifications.

Why the change?

Jibar is the underlying rate used to determine the value of trillions of rands worth of contracts, from floating-rate instruments, including bonds and notes (FRNs), to derivative contracts between banks, for example, agreeing to swap a floating rate over time (Jibar) for a fixed rate.

Jibar is determined by the five largest banks in South Africa (RMB, Standard Bank, Absa, Nedbank and Investec) submitting their three-month negotiable certificate of deposit (NCD) rate for the day. The highest and lowest quoted rates are removed and the average of the remaining three rates is the day’s Jibar rate. This fluctuates depending on the banks’ need for cash and is linked to the repo rate, which is set by the SA Reserve Bank (SARB). An issue arises because actual trade volumes in three-month deposit rates runs in the millions but impacts trillions of rands’ worth of contracts, posing a credibility and transparency threat and exposing the rate to potential manipulation.

Zaronia, by contrast, is essentially an overnight benchmark that reflects the interest rate at which commercial banks are trading wholesale funds with each other. The SARB uses a volume-weighted rate from each bank the rates at which it conducted overnight transactions. This essentially removes manipulation as the reference rate will be based on actual rates at which transactions have been undertaken at large volumes. The transaction volume associated with Zaronia is approximately 40 times that associated with Jibar. There is discussion around using average Zaronia rates over a pre-specified period, such as the average Zaronia rate over a one-month period, thereby smoothing daily fluctuations.

Libor Comparison

The issues of credibility and potential for manipulation have been experienced elsewhere in the world with banks having manipulated their reference rates in order to profit in other contracts. The Libor (London Interbank Rate) scandal, uncovered in 2012, was one of the most notable. Following its discovery, the Alternative Reference Rates Committee was established, making its recommendation in July 2017 to move to new reference rates, with Libor eventually ceasing in September 2024.

This led to the largest comparable transition currently facing South Africa: the change from Libor to the US’s Secured Overnight Financing Rate (SOFR) and the UK’s Sterling Overnight Index Average (SONIA). The Zaronia shift will be based largely on that change, following their lead in the various facets of changes and transitions required. South Africa will be able to benefit from these efforts and follow their guidance, and should therefore make the transition in under three years compared to Libor’s project which spanned over seven years.

Implications

Derivative markets in SA account for almost 90% of the current Jibar-linked market and hence a concerted effort has been made to ensure a smooth and fair transition in this market. A working group, the Market Practitioners Group (MPG), has been appointed to propose recommendations to SARB and other stakeholders for the most appropriate way forward. The MPG published a dynamic white paper in January 2023, where findings are adjusted as more information emerges.

Since November 2023, the SARB has published a daily Zaronia rate, together with eight years of historical data from January 2016 for comparison with Jibar. All rates before 31 October 2022 refer to pre-publication or proxy rates, 1 November 2022 – 3 November 2023 rates refer to Observation period rates, and after 3 November 2023 to-date are Official Publication rates.

Since Jibar is a three-month rate and Zaronia is an overnight rate, Jibar requires a premium over Zaronia and is thus slightly higher, reflecting the nature of a positive term structure, where this spread has been 15-25 basis points (bp). This is important as it sets the foundation for a “fallback” rate to be used in transitioning.

Challenges

This spread between Jibar and Zaronia will be used when transitioning into replicating financial exposure from Jibar to Zaronia. For example, if a contract used Jibar+100 bp, this might shift to Zaronia+120bp, if the fallback rate is set at 20bp. This fallback rate provides a default rate to be used, should parties not replace their Jibar risk before March 2026 and the methodology for this will be established in June 2025 for cash products and December 2025 for derivatives. It is encouraged that contracts are switched before the cessation date to avoid confusion and “forced” selling.

There are numerous challenges regarding the change to Zaronia. It necessitates changes in pricing loans and various derivative instruments, all formerly linked to Jibar, which will require underlying model changes and recalibration.

Existing loans and other contracts will need to be renegotiated to be fair to both parties, however equitable outcomes are difficult to guarantee or even be certain of years later with some contracts being up to 30 years in duration. This would also require costly legal reviews and fallback adjustments, potentially, so being proactive would be beneficial to all.

It is easy to understand why this change is necessary to protect the interests of key stakeholders and clients who are at an information disadvantage. However, this does come with great challenges, some of which have been outlined above. Fortunately, the SARB and other key stakeholders can lean on the vast experience of offshore counterparts and leverage a sophisticated financial sector.

ENDS