Member Article

Following our recent article on the end of the London Interbank Offered Rate (LIBOR), you may be wondering, “but what is happening to the Johannesburg Interbank Average Rate (“JIBAR”)? If I have a long dated loan referencing JIBAR, should I be adding some fall-back language?”

To recap, on a worldwide basis, central banks and regulators undertook a review of interbank lending rates after the financial crisis of2008. Off the back of this, and the scandal created by the alleged manipulation of major interest rate benchmarks, the International Organisation of Securities Commissions (“IOSCO”) published a report on the “Principles for Financial Benchmarks” in July 2013 after a public consultation process. The objective in the IOSCO report was to articulate policy guidance and principles for benchmark-related activities that addressed perceived conflicts of interest in the benchmark-setting process, as well as transparency and openness when considering issues related to transition.

The report proposed a set of recommended practices that should be implemented by benchmark administrators and submitters. The report also recommend that the application of these principles be proportional to the size and risks posed by each benchmark and/or administrator and the benchmark-setting process. The report recommends that benchmark administrators publically disclose the extent of their compliance with the principles on an annual basis.

Benchmarks are prices, estimates, rates, indices or values that are:

• made available to users, whether free of charge or for payment;
• calculated periodically, entirely or partially by the application of a formula or another method of calculation to, or an assessment of, the value of one or more underlying interests; and
• used for reference for purposes that include one or more of the following:
  • determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments,
  • determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument; and/or
  • measuring the performance of a financial instrument.

A benchmark administrator is an organisation or legal person that controls the creation and operation of the benchmark administration process, whether or not it owns the intellectual property relating to the benchmark. In particular, it has responsibility for all stages of the benchmark administration process, including,

• the calculation of the benchmark,
• determining and applying the benchmark methodology; and
• disseminating the benchmark.

In summary, the IOSCO principles cover a broad range of indicators but in relation to the quality and integrity of the benchmark, they require that the data used to construct a benchmark be based on prices, rates, indices or values that have been formed by the competitive forces of supply and demand (ie, in an active market) and be anchored by observable transactions entered into at arm’s length between buyers and sellers in the market for the interest the benchmark measures. This principle recognises that bona fide observable transactions in active markets provide a level of confidence that the prices or values used as the basis for the benchmark are credible.

Off the back of the IOSCO principles, most benchmark administrators and industry participants undertook a review of the benchmarks applicable in the jurisdictions in which they operated. As we know now, this resulted in a major review of LIBOR and the decision taken by the Financial Conduct Authority in the UK to end the publication and dissemination of LIBOR by the end of2021.

Similarly, in South Africa the South African Reserve Bank (“SARB”) undertook a review of JIBAR and published its findings on its website, in a Consultation Paper on JIBAR and other selected benchmarks in South Africa. The key findings in relation to JIBAR was that JIBAR did not measure up to the IOSCO principles established for benchmarking. The SARB found that:

• JIBAR is based on indicative screen rates and not actual transactions; and
• transactions in negotiable certificates of deposit (which are the funding instruments used by commercial banks) are used to determined three month JIBAR, and yet within the wholesale market, fixed and floating rate deposits comprise the largest source of funding, ahead of negotiable certificates of deposit which account for less than 3% of total issuances.

What the paper and follow up report also revealed, was that market participants, although recognising the obvious issues in JIBAR benchmarking methodology and credibility, were reluctant to change JIBAR due to concerns about the cost and complexity of phasing it out. The SARB postulated a number of possible alternatives without clear guidance as to a preferred alternative. When one looks at the outcomes of the consultation process that were published by the SARB in a follow-up report dated May2019, a large number of participants chose not to respond to questions that related to JIBAR reform, caused in part, we think, by the lack of clarity and guidance towards a preferred option leading to uncertainty.

Unfortunately, that leaves us right where we currently are. Still using IOSCO deficient JIBAR but with no clear path to its phasing out. The SARB undertook to publish a technical specification paper in late2019 but has not yet done so. The result is that we still do not have a clear indication of what the alternative risk fee rate to JIBAR will or is intended to be.

If you have financial instruments which reference JIBAR, you are probably okay without referencing a fall-back position unless it is long dated as to maturity. For longer dated financing arrangements with maturities in excess of fiveyears, we suggest that fall-back language be included to avoid the risk of the reference JIBAR rate becoming unavailable during the life of the transaction. If the reference rate ceases to exist, unless the loan is carefully worded, the parties may be drawn into costly disputes regarding the calculation of the interest rate and in the worst cases, could be faced with a transaction that cannot be performed due to impossibility, To date, we know of no pronouncement that hardwires an end date for the phasing out of JIBAR and compared to other jurisdictions we still have much work to do establish a credible alternative benchmark acceptable to market participants and which meets the IOSCO principles.

We will continue to look for updates although given the state of the world and the South African economy, it is likely the JIBAR project will take a back-seat in favour of more immediate issues.

We hope that you and yours are staying healthy and safe.

Deborah CarmichaelExecutive Banking and Finance[email protected]+27 82 787 9495

Clinton van LoggerenbergExecutive Banking and Finance[email protected]+27 82 526 2888