South African Rand Overnight Index Average launched

South Africa's Reserve Bank has announced a major shift in the country's financial market infrastructure by urging inter-dealer brokers to prioritize quoting linear derivatives using the South African Rand Overnight Index Average (Zeronia) over the traditional Johannesburg Interbank Average Rate (JIBAR). This move is part of a global trend towards more robust interest rates following instances of manipulation in key rates like LIBOR in Europe and the US. The decision to transition to Zeronia comes after years of deliberation and consultation, with the goal of enhancing the transparency and reliability of interest rates used in pricing derivative contracts. Zeronia, an overnight rate calculated based on wholesale deposits to commercial banks, differs significantly from JIBAR, which is a three-month rate determined using quotes rather than actual traded transactions. Bafundi Marunoti, Senior Manager for Market Operations and Analysis at SARB Financial Markets Department, explained that the shift is essential to address the susceptibility of JIBAR to manipulation and align with the Financial Stability Board's principles for benchmark rate determination, which emphasize the use of observable transactions. With approximately R40 trillion worth of derivative contracts referencing JIBAR, the need to strengthen the underlying rate was paramount. The market's perception and sentiment towards the transition initially faced challenges, given the differences between JIBAR and Zeronia. However, drawing lessons from advanced economies like the US and the UK that have successfully migrated to alternative reference rates, South Africa has been able to navigate the complexities of the transition. Despite initial apprehension, industry stakeholders have gradually come to grasp the importance of adopting a more reliable and transparent interest rate benchmark. The phased approach to implementation includes managing existing contracts that reference JIBAR and ensuring a smooth transition to Zeronia. Three categories of contracts have been identified: those maturing before the cessation date for JIBAR, those maturing post-cessation with embedded language allowing for a rate change, and 'tough legacy' contracts without provisions for rate adjustment. The SARB is working on legislation to address tough legacy contracts by introducing a synthetic JIBAR with a credit spread adjustment to compensate for potential losses. Looking ahead, the Reserve Bank targets the end of 2025 to announce the final cessation date for JIBAR, with December 2026 currently earmarked as the anticipated deadline. The Market Practitioners Group overseeing the transition process is committed to ensuring a seamless shift from JIBAR to Zeronia, with a focus on safeguarding the integrity of financial contracts and market stability. As South Africa aligns with global best practices in interest rate benchmark reforms, the introduction of Zeronia marks a significant milestone in strengthening the country's financial market infrastructure. The SARB's proactive approach to enhancing transparency and reliability in interest rate benchmarks sets a benchmark for other emerging markets to follow suit.