The transition from the Johannesburg Interbank Average Rate to the South African Rand Overnight Index Average: An update on the legal journey

March 1st, 2024
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In 2018, the South African Reserve Bank (SARB) formed the Market Practitioners Group (MPG) and, since then, has worked together with market participants, other regulators, and industry organisations to pursue a transition from the Johannesburg Interbank Average Rate (JIBAR) to the South African Rand Overnight Index Average (ZARONIA).

ZARONIA has been published by the SARB for a period of 12 months during an observation period and became available for use by market participants from 3 November 2023. ZARONIA is published on the SARB’s website every South African business day at 10:00 and can be accessed (here: ZARONIA Interest Rate Benchmark (www.resbank.co.za)).

Several workstreams were established under the MPG to focus on the following: Cash market, transition, coordination and planning, data collection and infrastructure, governance, communications, derivatives, accounting, and tax and lastly, legal matters. This article provides an update on the legal work that has been pursued by the Legal Workstream of the MPG in recent months.

The Legal Workstream is tasked with –

  • providing legal support and insights to the MPG and other workstreams regarding the legal implications of the transition;
  • facilitating engagements with relevant industry bodies to effect necessary amendments to legal documentation; and
  • providing guidance to legal practitioners whose work may be impacted by the transition.

The Legal Workstream has worked with industry associations, such as the International Swaps and Derivatives Association (ISDA), Loan Market Association (LMA) and International Capital Market Association (ICMA) and has also leveraged from the insights of experts in other jurisdictions such as the Bank of England.

In March 2023, the Legal Workstream developed an ISDA Fallbacks guidance document (Guidance Document) to provide high-level and simple explanation of the 2021 ISDA Interest Rate Definitions and the ISDA 2021 Fallbacks Derivatives Protocol for MPG members. ISDA published the ZARONIA definition in the revised 2021 Interest Rate Definitions in October 2023. The Guidance Document serves as a guide and prelude to the inclusion of ZARONIA in the 2021 ISDA Interest Definitions.

The amendment of agreements to change from one benchmark rate to another will be an important aspect of the transition. To assist with a seamless cessation of JIBAR, the Legal Workstream invited legal practitioners from across the financial sector to join the first Legal Workstream industry webinar, which was held in September 2023. The aim of the webinar was to introduce the transition to legal practitioners who may not; and to provide those legal practitioners who were aware of it with a more detailed update on the transition’s progress, as well insights into key aspects to consider as the transition progresses. A link to the recording of the industry webinar is available (here: Market Practitioners Group Legal Industry Webinar: The transition to ZARONIA (www.youtube.com)).

In November 2023, the LMA published a replacement of screen rate clause and user guide that syndicated loan market participants who are entering into new loan contracts which reference JIBAR can use in their legal documentation. The document is also available (here: Recommended revised form of replacement screen rate clause and users guide for use in the South African market (Loan Market Association) (www.resbank.co.za)).

One of the important initiatives for a successful transition is to pass regulations to deal with contracts that cannot be migrated to ZARONIA prior to the cessation of JIBAR (commonly known as tough legacy contracts). In this regard, the Legal Workstream will be working with the governance workstream to ensure the timeous promulgation of such regulations.

2024 promises to be as eventful and successful as 2023 has been. Discussions with Bloomberg and ISDA are already underway regarding Bloomberg’s publication of the fallback rates to support the efforts towards the publication of an ISDA Fallback Protocol for ZARONIA; the document mapping of contracts impacted by the transition and how they can be supported upon the cessation of JIBAR will be ongoing in 2024; and the Legal Workstream will continue to work closely with the relevant stakeholders to introduce the relevant regulatory framework for the cessation of JIBAR. And, finally, more effort will be made to engage with and include as many legal practitioners as possible into the transition fold and to improve communication in the coming year.

Prudence Zitha BA LLB (Wits) is Legal Counsel at the South African Reserve Bank.

This article was first published in De Rebus in 2024 (March) DR 18.

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