Fundi Tshazibana: The reform of interest rates
Central bank: sarb | Type: speech | Date: 2020-11-07

## Opening remarks by Ms Fundi Tshazibana, Deputy Governor of the South African Reserve Bank at the Market Practitioners Group Forum 6 November 2020Ladies and gentlemen, good morning and welcome to the Market Practitioners Group (MPG) Forum.The MPG is a joint public and private sector body that was established by the South African Reserve Bank (SARB) to facilitate decision-making on matters relating to the reform of interest rate benchmarks in our country.

Since its establishment in October 2018, the MPG has had various interactions with industry stakeholders and has set up substructures to craft the design of alternative interest rates in South Africa.

The MPG also leads

South

Africa's

transition

to

a

new

and

more

robust

interest

rate dispensation.

Importantly,

the

work

of

the

MPG

and

its

substructures,

which

I

will allude to and contextualise shortly, forms part of a global agenda to strengthen existing interest rate benchmarks and identify alternative near risk-free rates.Let me now briefly provide some context for those who may not be aware of the origins of the work on the reform of interest rates.

In the major financial markets, reference rates, such as the London Interbank Offered Rate (Libor) and Euro Interbank Offered Rate (Euribor), are widely used as benchmarks for a large volume and broad range of financial

products

and

contracts.

These

rates

encountered

episodes

of

attempted market manipulation and false reporting.

This, together with the decline in liquidity in interbank unsecured

funding markets

after the global financial crisis (GFC), undermined

confidence

in

the

reliability and

robustness

of

existing interbank benchmark interest rates.These developments meant that the lack of integrity in the determination processes of some

critical

reference

rates

represented

a

serious

source

of

vulnerability

and systemic risk.

As such, the Financial Stability Board undertook a fundamental review of major interest rate benchmarks.In

line

with

global

developments,

the

SARB

established

the

MPG

following

the publication of the 'Consultation paper on interest rate benchmarks in South Africa'.

The consultation paper, among other things, considered whether there was a case for the

reform

of

the Johannesburg

Interbank

Average

Rate

(Jibar)

and

explored

the development of new benchmarks.

The case for reforming the Jibar, which is the most widely used reference rate in South Africa and is therefore of systemic importance, was informed by a number of concerns, including that:- i. the Jibar is currently not underpinned by a large number transactions, which is a desirable and an essential characteristic of a benchmark interest rate according to the principles for financial benchmarks

developed

by

the

International Organization of Securities Commissions (IOSCO);- ii. market

activity

in

three-month

negotiable

certificates

of

deposit

(NCDs),

which forms the basis of the most widely referenced three-month Jibar, has declined both in nominal terms and as a share of wholesale bank funding - currently, threemonth NCD volumes make up less than 5% of NCD issuance; and- iii. the

current

calculation

methodology

for

the

Jibar

is

vulnerable

to

potential manipulation.In addition to strengthening benchmarks to guard against potential malpractice, the SARB has also been cognisant of the role interest rate benchmarks play insofar as they serve as reference rates for a large number of financial contracts.

This implies that they have a key role to play in the transmission of monetary policy decisions and the cost of (and remuneration of) capital in the broader economy.While the SARB was initially at the forefront of the development of proposals on how this reform could be achieved, the mandate for determining a market-preferred choice of a reference rate to replace the Jibar was given to the MPG.

The MPG was then organised

in

such

a

way

that

it

comprises

users

of

reference

rates

from

differentpockets

of

the

market,

including

members

of

the

savings

industry,

corporate treasuries, the banking sector and the official sector.The

MPG

established

five

work

streams,

focusing

on

the

different

aspects

of

the project.

These work streams include:- i. the Unsecured Reference Rate Work Stream, chaired by Mr Deon Raju from Absa;- ii. the Risk-Free Reference Rate Work Stream, chaired by Mr Andries du Toit from FirstRand;- iii. the Data Collection and Infrastructure Work Stream, chaired by Mr Ruan Roux from the SARB;- iv. the Transition Work Stream, chaired by Mr Paul Burgoyne from Standard Bank;- v. the

Governance

Work

Stream,

chaired

by

Ms

Elmarie

Hamman

from

the Financial Sector Conduct Authority; and recently- vi. the Communications Work Stream, chaired by Mr Zafar Parker from the SARB.Collectively, the effort of these work streams and the Financial Markets Department of the SARB has culminated in an important body of work that will underpin South Africa's transition to alternative reference rates.

We see this transition process as one which entails multiple and carefully sequenced steps, beginning with the stabilisation of the Jibar to secure the transition period.

This is followed by the establishment of new rates and foundations for new markets, and then by the adoption of those rates before full transition takes place.Thus far, the work of the MPG has largely focused on strengthening the current Jibar framework in line with the first step, as well as on finding new alternatives.

This work has now been completed and the project is proceeding to the next phase which entails thinking about the most suitable transition approach to be adopted by South Africa.

As its

work

is

advancing,

the

MPG

intends

to

keep

all

stakeholders

informed

of

its progress and the next steps, and this is why we are here today.

Thus, the purpose of today's MPG Forum is twofold:-  first,

to

report on and inform stakeholders of key decisions, considerations and recommendations made by the MPG in relation to the reform of the Jibar and the choice of an alternative overnight reference rate for South Africa; and-  second, to outline the envisioned transition process to an overnight rate as a key reference rate for the South African financial market.As we engage in this conversation, I wish to reiterate the position the SARB has taken regarding the future of the Jibar.

Earlier, I alluded to deficiencies in the current Jibar framework, which have led to the SARB taking a decision to reform the Jibar.

The Unsecured Reference Rate Work Stream and later the Jibar Task Team have done commendable work in this regard, to ensure that the Jibar framework is strengthened to enhance its robustness.

However, changes to the Jibar framework should not be understood as implying that the Jibar will continue indefinitely.The SARB, as the benchmark administrator of the Jibar, has decided that the Jibar will cease at some future point.

The enhanced framework will remain in place for a limited time, after which South Africa will transition to alternative reference rates.

In the new interest rate dispensation, we expect that the key reference rate will be an overnight near risk-free rate, which may or may not co-exist alongside a risk-based term rate.At this point I would like to hand over to my colleagues to share with you the decisions that have been taken thus far, their motivations as well as the trade-offs we have had to manage leading up to those decisions being taken.Thank you.