Navigating the transition from Jibar to Zaronia

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SIMON BROWN: I’m chatting now with Yushavia Ramlall, COO at Intengo Market. Yushavia, appreciate the early morning. Jibar [Johannesburg Interbank Average Rate] is being replaced by Zaronia [South African Rand Overnight Index Average]. I’ve had a number of conversations over many years. This has been a process that is happening, but we’re now getting to the end point. December 31st is the key.

But people hear ‘Jibar is being replaced by Zaronia’ and assume it’s just a rate change. You made the argument that it is actually something bigger. Well, let’s start with what is actually changing. What is the core difference here?

YUSHAVIA RAMLALL: Good morning, Simon. Thank you very much for having me. Yes, we are finally here and, very simply put, under Jibar it was a forward-looking rate. So you really knew your rates up front. With Zaronia, you now have a backward-looking rate, and your overnight rate needs to be collected, it needs to be compounded daily. What this means is that your final interest rate is only known much later in the process.

So from a treasury and a finance perspective, now your forecasting and your accruals need to account for estimates. And from a liquidity perspective there’s a lot less certainty at the beginning of a period – I think, more importantly, conventions that need to be applied consistently and daily rate ingestion.

Read:
The conversion from Jibar to Zaronia – how and why
Zaronia initiative launched to lessen Jibar reliance

So under, for example, [for] a three-month Jibar-linked contract, you would have four data points across a 12-month period, and you’ve now got 365 in that same period. So it is quite significant.

SIMON BROWN: I hadn’t thought of that, of course. I’d got the forward versus backward looking. But in in a note you put out you talk around the ‘spreadsheet trap’. For the typical treasury department, what does it look like right now – and they’re going to have to make some fairly significant changes to processes and systems.

YUSHAVIA RAMLALL: You hit the nail right on the head. I think that’s the crux of what I’ve been trying to get at. Under Jibar, treasury teams have managed perfectly fine for all of these years and that’s not really the issue here.

It’s just that under Zaronia, there’s a lot more pressure that’s being placed on operating processes.

So, as I said, when you go from knowing something up front to now knowing something a couple of days before an interest payment, you really need to be sure of the operating discipline behind your calculations. What may have worked before may not necessarily work going forward.

Just on the spreadsheet trap, spreadsheets are definitely not the enemy. Most finance professionals use spreadsheets. I certainly use spreadsheets on a daily basis. It’s more around do you really want to have a major funding obligation rely on an uncontrolled or potentially ungoverned spreadsheet with one person’s institutional knowledge? How certain are you around the controls and the calculations behind that spreadsheet?

Read: The spreadsheet trap: Why Zaronia is really a governance challenge

SIMON BROWN: I get you and it’s around process. To  be clear, love me a spreadsheet as well. Many of these institutions, organisations, have processes. But I like your point there around the weak spot might be that it’s one individual.

It comes back to the point that process, systems, those sorts of things need to be very much in place and more with Zaronia. As you mentioned, 365 data points instead of four.

YUSHAVIA RAMLALL: One-hundred percent. And I think that is probably the most important point in the article that I wrote. Naturally people view Zaronia as this benchmark reform project, and then you focus on the interest rate and the methodology and the calculation.

But if you step back, finance and treasury teams have been calculating interest very capably for the entire span.

So I think the more interesting question that Zaronia introduces is whether an organisation can actually demonstrate where they’ve got their benchmark data, what controls were applied, what approvals were obtained, and whether they can actually repeat that process robustly and consistently going forward every single time.

Read:
Fortress raises R1.6bn in landmark Zaronia-linked bond
Standard Bank issues SA’s first Zaronia-linked bond
Zaronia: Reserve Bank seeks reference rate debate feedback

SIMON BROWN: Absolutely. It’s that robustness. And the numbers – what, R43 trillion Jibar-linked, and that’s its local exposure is over R100 trillion on offshore.

Is your sense that we are broadly ready? I take your point that a lot of this is going to be happening within the organisations, but you’re obviously speaking to folks, you’re having conversations. Are we ready? We are now 90 days away, a little over 90 days.

YUSHAVIA RAMLALL: It’s very much fast approaching. I think I would say readiness is on a spectrum. So, there are [many] organisations who are fully into this. They’ve already converted a couple of their instruments.

But for me, what it really boils down to is this. As an organisation do you have an understanding of your Jibar-linked exposure? Do you understand the underlying contractual outcome and whether that can be operationally executed?

And have you actually stress-tested that process end-to-end, from your benchmark rate ingestion right down to your final payment?

If you haven’t, or you can’t reliably demonstrate that process end to end, then I think you’re potentially not operationally ready and you have some 90 days to get there.

Read: SA taps London to boost new benchmark rate adoption

SIMON BROWN: Yes, don’t panic, but start moving fast. Where’s the bite? Is this the risk of getting a payment wrong or is this really more about that process? The point that you made a moment ago is being able to sort of show the chain of thought and process.

YUSHAVIA RAMLALL: Yes, absolutely. So I think, practically, the risk is you get a payment wrong or you’ve got timing delays to investors, or mismatch between payments, et cetera.

But I think ultimately what that potentially shows investors is that there is a weakness in your operating process, and that weak controls introduce uncertainty. And investors tend to price uncertainty through some sort of combination of appetite, scrutiny – and then potentially price.

SIMON BROWN: Yes, I love that. Weak controls, and ultimately that will show up in price. It absolutely will.

We’ll leave it there. Yushavia Ramlall, COO Intengo Market, appreciate the early morning time.

#Navigating #transition #Jibar #Zaronia