As the global financial services industry finally weans itself off the London Interbank Offered Rate (LIBOR), South Africa’s financial industry is set to embark on its own reform. The country will transition from the Johannesburg Interbank Average Rate (JIBAR) to its own risk-free reference rate – the South African Overnight Index Average (ZARONIA).
For South African financial institutions, the last few years of LIBOR transition will no doubt have been an insightful undertaking, with operational and financial impacts across investment banking, global markets and treasury. JIBAR transition will follow a similar path, however, banks will need to account for tens of thousands of JIBAR deals, rather than a few hundred LIBOR-linked deals – an increase in volume that comes with its own complexities.
Monocle’s IBOR (Interbank Lending Rate) Transition insights paper, highlighted three main impact areas – systems and processes, exposure analysis and new contracts – for banks to prepare for the LIBOR transition in 2021 and beyond. Due to the similarities between the LIBOR and JIBAR transition, the operational changes that were made for new international risk-free rates (RFR) will cater to many of the ZARONIA requirements. However, with the increase in volume, the entrenchment of JIBAR across the South African financial system and the SARB’s push to have the transition completed within three years, Monocle has highlighted several key challenges banks should consider before their transition ramps up.
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 fallback language (contractual terms relating to the replacement rate that would apply if the relevant benchmark became unavailable) and renegotiate terms, including credit spread adjustments.
This is an intensive administrative initiative and could overwhelm a program if not managed consistently throughout the transition timelines. This was the case for American financial institutions where around $700 billion worth of US junk loans had not been delinked from USD-LIBOR just 30 days before its ultimate cessation (30 June 2023). As a result, these contracts were at risk of falling back on more costly base rates if not transitioned to SOFR (the benchmark RFR elected for dollar-denominated derivatives and loans) in time.
Strong program management that can consider and manage the distinct operational, financial, risk and legal tasks
will be essential. However, program management will need to drive a collaborative approach that ensures functions
and business units across the bank remain informed and aligned on emerging risks and complexities.
Critical tasks to be considered by program management include:
System and process updates to cater for ZARONIA.
Existing JIBAR-linked contracts to be amended with fallback clauses and renegotiated for voluntary transition.
Downstream risk, finance, tax, operational and reporting changes to accommodate ZARONIA.
Effective communication (both internally and externally) of transition impacts and changes.
Comprehensive change management across investment banking, markets, treasury and operational teams to fully understand and adapt to new ZARONIA processes.
See the IBOR (Interbank Lending Rate) Transition insights paper for further detail on these items.
Currently, South African banks are required to report their JIBAR-linked exposures to the SARB on a quarterly
basis – with the frequency to increase to a monthly submission as the transition deadlines approach.
This reporting process will form the backbone of a firm’s programme management for the transition as
a consolidated and continuously updated view of a bank’s exposure.
However, the need for additional data points, beyond those required by the SARB, will play a pivotal role in
assisting legal teams in identifying legal contracts that need to be amended or renegotiated as JIBAR cessation
approaches. This is particularly troublesome when it comes to legal enrichment data, such as the assigned
legal advisor for each contract, that is traditionally stored solely in unstructured PDF legal agreements.
For many banks, the sourcing and review of these legal agreements and the required data points remain part
of a largely manual process.
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 these 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. Similar solutions can be implemented for ISDA contract support annexes agreements.
Not only does this eliminate the risk of fat-finger errors when transaction managers manually capture the contractual terms and conditions, but critically ensures that JIBAR exposure reporting can be based off the primary and legally enforceable arrangements rather than system data. The reliability of data is a critical issue for banks that are involved in complex investment bank deals that cannot be accurately booked on a front-end system to reference JIBAR (due to system or operational constraints). This can lead to certain JIBAR linked deals not being identified.
South African banks will need to complete a system and process impact assessment for JIBAR transition. Such an assessment will need to consider that updates for vendor systems or in-house development may have been completed over the last few years to cater for backwards looking reference rates through a compounded in arrears calculation as part of their LIBOR 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. For large corporate and investment banks in South Africa, their exposure consists of tens of thousands of derivative trades and thousands of loans linked to JIBAR – a 10x increase in volume from their LIBOR exposures.
Throughout several years of LIBOR transition, Monocle has been actively involved across the banking value chain to help prepare for and manage the operational changes at our various banking clients.
With extensive expertise across trade management, treasury, finance, front office risk and pricing, as well as system and data infrastructure, Monocle is expertly positioned to assist our clients as they prepare for the challenges associated with their JIBAR transitions. Our risk-free rate transition project experience includes: