South Africa is undergoing a significant reform of its benchmark interest rates, shifting from the Johannesburg Interbank Average Rate (JIBAR) to the South African Rand Overnight Index Average (ZARONIA). This reform is part of a global initiative aimed at enhancing the reliability, accuracy and transparency of financial market benchmarks following widespread issues with benchmarks like the London Interbank Offered Rate (LIBOR).
Historically, JIBAR has been South Africa’s primary reference rate for pricing various financial instruments, from loans and mortgages to complex financial derivatives. However, JIBAR has increasingly come under scrutiny due to its reliance on submissions from a limited number of banks, rather than actual, observable market transactions. This submission-based methodology has left it vulnerable to manipulation and inaccuracies, resulting in a lack of trust amongst market participants. In addition, the significant decline in the volume of transactions underpinning JIBAR has further eroded its representativeness and relevance to current market conditions.
To address these issues, ZARONIA has been developed as an alternative. Unlike JIBAR, ZARONIA is calculated daily based on actual overnight lending transactions between South African banks. This transaction-based methodology ensures that ZARONIA accurately reflects real market activity, significantly raising transparency and reliability. As a near risk-free rate, ZARONIA is designed to provide a stable and trustworthy benchmark for financial contracts.
The transition from JIBAR to ZARONIA is structured such that there is minimal market disruption. The phased approach includes:
- Early 2025: Initiation of ZARONIA-based derivatives, setting the stage for broader market adoption.
- End of 2025: Formal announcement specifying the exact cessation date for JIBAR.
- End of 2026: Complete discontinuation of JIBAR, with all remaining contracts fully transitioned to ZARONIA or other approved reference rates.
Another component of this transition is the introduction of the Credit Adjustment Spread (CAS). The CAS will be applied to existing contracts to maintain economic equivalence between the outgoing JIBAR rate and the incoming ZARONIA rate. This ensures that all parties remain economically unaffected by the transition, safeguarding contractual integrity and investor interests.
We recognise the importance of a smooth transition and are fully committed to protecting our investor interests throughout this process. Our proactive measures include:
- Systems and technology updates: We are rigorously upgrading our operational and technological infrastructure to handle the new benchmark seamlessly, ensuring continuity in pricing, valuation, and risk management processes.
- Contractual adjustments: Our legal teams are hard at work reviewing and amending contractual agreements, embedding fallback provisions and CAS clauses to ensure legal and economic continuity.
- We are actively involved in the Market Practitioners Group (MPG) to facilitate the final decision.
- Investor communication: We remain committed to keeping our investors informed with regular updates, detailed insights, and personalised support to manage and mitigate any potential impacts effectively.
Old Mutual Alternative Investments remains dedicated to transparency and investor protection. We understand the significance of this benchmark reform and are committed to providing ongoing support and clear communication throughout the transition period.
For further details or specific concerns about your investments and how this transition might affect you, please contact your OMAI client executive directly.
For more information on ZARONIA, you can find additional information from the South African Reserve Bank in the links below: