A quiet revolution is brewing in the heart of SA’s financial system.
The Reserve Bank, along with the capital markets regulator, the Financial Sector Conduct Authority, and industry players, has been laying the foundations for a new benchmark rate to replace the Johannesburg interbank average rate (Jibar) since November 2023.
The seismic change traces its origins back to the global financial crisis and the notorious Libor scandal, which revealed the frailties of legacy benchmark rates. The Libor — London interbank offered rate — exposed deep-rooted flaws in the existing benchmark rate system, where several major banks manipulated the rate for their own financial gain.
This manipulation affected the pricing of trillions of dollars worth of financial products, from mortgages to student loans and derivates, ultimately shaking global trust in these benchmarks.
SA’s answer to these issues is Zaronia — the SA rand overnight index average — a benchmark rooted in actual transactions, unlike Jibar, which is based on expert judgment from contributing banks. Think of it as swapping your fortune-teller for a hi-tech weather station — more precise, real-time data, less guesswork
“The primary reason for the transition is to ensure that the interest rate underpinning the instruments in our institutional financial markets is robust, reliable and representative of actual market transactions,” said Cecile Lötter, a senior manager at Deloitte’s financial services advisory division.
“Unlike Jibar, Zaronia is a transaction-based rate reflective of a large and diverse pool of overnight wholesale deposits. Jibar, on the other hand, is a polled rate with a small number of contributors.”
Interbank lending is the lifeblood of the financial system, allowing banks to lend money to each other to manage liquidity — much like friends lending each other cash in a pinch. Interbank rates like Zaronia capture the true cost of these overnight loans based on actual market transactions, mirroring the real dynamics of interbank lending.
The implications of the transition for ordinary people are profound. Benchmark rates directly affect interest rates on everything from home loans to savings accounts. A more transparent, dependable rate like Zaronia promises fairer pricing, restoring market confidence and potentially benefiting consumers, say its cheerleaders such as Rashad Cassim, deputy governor of the Reserve Bank.
“I hope you will look at this transition not as a chore or a burden to be taken on with great reluctance, but as an opportunity — an opportunity to build better markets as we navigate together to a new benchmark,” Cassim, an instrumental figure in guiding the transition, told industry players at a recent conference.
No silver bullet
Still, not everyone is fully on board with the change.Critics argue that transaction-based benchmarks like Zaronia are not immune to manipulation, and even real-time data can be susceptible to collusion. In the Journal of Economic Issue, a well-regarded academic publication, Lilian Muchimba, an economist at the Bank of Zambia, said the opaque nature of interbank money markets could still lead to anticompetitive behaviour.
“The opaque nature of interbank money markets, governed by conventions, trust, and reciprocity, makes them susceptible to collusion even in the absence of explicit co-ordination,” Muchimba said.
In these markets, banks make loans to each other privately, or over the counter (OTC), meaning the details are not publicly available. This lack of transparency can obscure competitive pricing — just like in the friends’ lending club — and make it difficult to detect if banks collude to set unfair rates.
“Without visibility into these transactions, regulators and other market participants can’t easily ensure that the rates reflect market conditions,” Muchimba said in the study titled “Could Transaction-Based Financial Benchmarks be Susceptible to Collusive Behaviour?".
“The OTC nature of these markets means that trades are conducted privately, away from public scrutiny, which can obscure competitive pricing,” said Muchimba, who also highlighted bilateral reciprocal dealing relationships, under which two banks have an unwritten understanding to give each other a good deal because they do business together regularly, as a dynamic that can lead to potential collusion.
Momentum picking up
Even so, the move to transaction-based benchmarks has gained traction globally. In the US, secured overnight financing rate (Sofr) has replaced Libor, while in Eurupe Euro short-term rate (Ester) has taken over from Eonia. At home, Cassim has pulled together several measures to support the shift, including the SA rates reform programme, which offers regular engagements with stakeholders, training sessions, and the development of new financial instruments aligned with Zaronia.
The volume of contracts tied to Jibar is immense, exceeding R57-trillion in gross exposure, predominately in derivatives. Adjusting these contracts is a daunting task, compounded by the need for legal and logistical recalibrations. The International Swaps and Derivatives Association, a global trade organisation that counts derivatives dealers as members, has recommended using a five-year average interest as a benchmark to ensure fairness and constitution when transitioning to a new benchmark like Zaronia.
“While the challenges are significant, the long-term benefits of adopting a transparent, robust benchmark rate far outweigh the short-term difficulties. Commitment to this change is essential for the stability and credibility of our financial markets,” Cassim said.
The transition from Jibar to Zaronia is set to be completed by the end of 2026.
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