The great JIBAR to ZARONIA transition: how this will impact your business systems
The JIBAR is still currently the key money market reference rate and represents banks’ cost of borrowing for maturities of up to 12 months. It underpins the rate at which banks can lend to their customers, and so has a wider effect on corporate borrowing and on the economy.
It is the most widely used reference rate in financial contracts, with the Reserve Bank estimating that the financial value of outstanding contracts referencing the three-month JIBAR exceeds R340.6-trillion (E. Iilkova & K. Silberman, “Replacing JIBAR with ZIRONIA”, RMB).
South Africa will soon transition from the Johannesburg Interbank Average Rate (JIBAR) to its own risk-free reference rate – the South African Overnight Index Average (ZARONIA) just as the global financial services industry is weaning itself off the London Interbank Offered Rate (LIBOR). This will affect operational and financial impacts across investment banking, global markets and treasury.
The transition will also have wide-ranging consequences across SA’s financial system and could be disruptive. In the real economy, contracts linked to JIBAR or prime will be switched to compounded-in-arrears ZARONIA rates.
In the financial markets the pricing of all debt securities and various types of interest rate derivative contracts will change to the new reference rate. The benchmarks against which investment performance is measured will have to be revised, particularly in the money market.
Changing investment mandates is a process that in practice tends to take far longer than expected. We and many others have noticed three main impact areas – systems and processes, exposure analysis and new contracts within the financial sector space.
Some of the challenges include:
- South African banks and corporates will need to complete a system and process impact assessment for JIBAR transition. While impacts to systems and processes may be minimal, IT operation teams will now need to assess the implications that a compounded in arrears calculation will have on performance, considering the significantly larger scope of ZARONIA-linked contracts compared to SOFR and SONIA.
- IT systems and platforms that currently rely on JIBAR as a reference rate will need to be updated to accommodate ZARONIA. This includes core banking systems, risk management platforms, and trading systems.
- ZARONIA is a new rate, and historical data may not be readily available. IT platforms will need to integrate ZARONIA data feeds and ensure accurate historical records. Data pipelines, databases, and reporting tools must be adjusted to handle ZARONIA data seamlessly.
- Financial models and valuation tools that rely on JIBAR for pricing derivatives, bonds, and other financial instruments will need to be recalibrated for ZARONIA. IT teams must validate and update pricing models to reflect the new reference rate.
- Downstream reporting will need to be updated to account for the shift from JIBAR to ZARONIA. Reports will need to be modified and tested for accuracy and compliance before publishing.
- For JIBAR-linked loans and derivatives that are not set to mature before the JIBAR cessation date (2026), banks’ legal teams will need to ensure that related contracts are amended to include the appropriate language and renegotiate terms, including credit spread adjustments.
- Strategically, JIBAR transition provides firms with the opportunity to begin standardising their legal agreements as they renegotiate certain deals for the transition. This paves the way for a data digitisation process for legal contracts, whereby standardised data inputs to legal agreements can be automatically identified, captured via optical character recognition tools and loaded onto front-end loan and trade systems at a deal/trade level.
Caution will need to be applied as the market transitions to the use of ZARONIA as a reference rate in financial contracts — especially since such financial contracts span wider than the banking sector, affecting the stability and efficiency of the entire financial system. Consistency across loans, securities and hedging instruments is critical.
How Digiata can help?
At Digiata, we combine data proficiency, low-code agility, and investment management expertise to guide corporates through a successful transition to ZARONIA. Our low-code rapid application development approach ensures a smooth shift while minimising disruptions, maximising efficiency and cost savings.
To help our customers transition from JIBAR to ZARONIA using our bespoke portfolio management and trading platforms we have focussed on:
- Data Integration: Seamlessly integrate ZARONIA data feeds into existing systems. They ensure accurate historical records and real-time updates.
- Data Quality: Validate and cleanse data to maintain accuracy and consistency.
- Data Migration: Facilitate smooth migration from JIBAR-related data to ZARONIA in a way that’s audited, accurate and with minimal disruptions.
- Reporting: Ensuring the delivery of accurate data and re-designing reports to incorporate ZARONIA complaint data.
