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Reforming South Africa's interest rate

The Market Practitioners Group (MPG) is a joint public and private sector body, comprising  representatives from the SARB, the Financial Sector Conduct Authority (FSCA), and senior professionals from a variety of institutions from different market interest groups active in the domestic money market. The primary purpose of the MPG is to facilitate final decisions on the choice of interest rate benchmarks to be used as reference interest rates for financial and derivative contracts, and to direct market participants through an orderly transition towards the use of those benchmark rates.

In June 2020, the SARB published the Draft Statement of Methodology and Policies Governing SARB-administered interest benchmarks , which is a technical specification paper that details the calculation methodologies, contingency arrangements and policies governing four new benchmarks and a reformed version of the existing overnight benchmark rate – the South African Benchmark Overnight Rate (Sabor). The MPG has designated one of the benchmarks, namely the South African Overnight Index Average (ZARONIA) as the preferred successor rate that will most likely replace the Johannesburg Interbank Average Rate (Jibar), which currently underpins a significant number of financial contracts. Consequently, the conceptual design of ZARONIA was rigorously tested using bona fide transactions data to ensure that it is reliable, robust and sufficiently stable. The back-testing results were published in a report titled Feedback on the draft statement of methodology and policies governing the SARB-administered interest rate benchmarks .

The MPG will remain in existence until the new benchmarks have been implemented and embedded, after which the Reference Rate Working Group of the Financial Markets Liaison Group (FMLG) will assume responsibility for further work on reference interest rates.

Interest rate benchmark reform journey

Workstream

The MPG relies on dedicated workstreams and technical subgroups to carry out its objectives. The workstreams and technical subgroups have a responsibility for providing technical input and recommendations to the MPG on specific issues that are relevant to the transition from the Jibar. Members of these workstreams are drawn from a diverse set of market practitioners whose insights and expertise are required to give effect to the mandate of the MPG as well as shape industry opinions on the reform agenda.
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Jibar post-trade disclosures
Jibar code of conduct documents

ZARONIA interest rate benchmark

Compounded ZARONIA Period Averages and Index

The Cash Market Workstream (CMW) is mandated to make recommendations on the adoption of the successor rate in cash market products, which includes developing appropriate market conventions and overcoming transition barriers. The CMW will identify segments of the market that require a forward-looking term rate and recommend alternative options for their transition. It has established two subgroups to focus on the different needs of the loan and bond markets respectively.

The Transition Planning Workstream is mandated with examining options for transition from legacy reference rates to those proposed by the relevant workstreams. This work entails identifying key risks (market, legal, operational, etc.) and making final recommendations to the MPG on timelines and steps of transition.

The Governance Workstream is mandated with providing input into the drafting of codes of conduct and operating rules for the key interest rate benchmarks used as reference interest rates, the design of a surveillance framework for key interest rate benchmarks used as references, and the design of the control framework pertaining to the determination and distribution of interest rate benchmarks.

The Derivatives Workstream is mandated with making recommendations on the development of derivate markets and contracts that reference the successor rate. This workstream also aims to consider strategies to facilitate market adoption and encourage the cessation of issuing contracts referencing old reference rates.

The Legal Workstream aims to draw on the expertise of legal teams/counsel to provide a view on potential consequences of firms failing to transition to the alternative reference rates within specified timelines. This workstream is also mandated with identifying potential challenges market participants could face in updating contractual documentation, as well as identifying risks of contractual breaches.

The Accounting and Tax Workstream is mandated with identifying issues that could hinder the transition to alternative rates as well as proposing solutions to address them. The workstream will highlight these issues to the MPG (which may in turn need to communicate with regulatory authorities) to help facilitate the uptake of the successor rate or to help minimise potential disruptions in the event that Jibar is no longer usable.

The Unsecured Reference Rate Workstream was mandated with making final recommendations to the MPG relating to the choice and design of reformed interest rate benchmarks in South Africa that include bank credit risk. This workstream also had a mandate for developing proposals on strengthening the current Jibar framework.