In the light of recent developments regarding the London Interbank Offered Rate (Libor), the South African Reserve Bank (SARB), National Treasury (NT), Financial Services Board (FSB) and the Johannesburg Stock Exchange (JSE) have evaluated the situation with respect to reference rates in the domestic financial markets, with particular reference to the Johannesburg Interbank Agreed Rate (Jibar). The daily calculation and publication of the Jibar rates is overseen by the JSE. The JSE is a regulator in its capacity as a self-regulatory organisation (SRO) for certain activities, but in turn is also regulated by the FSB.
The Jibar is the main benchmark for money-market interest rates and is published daily at 11h00 on the JSE website and on Reuters SAFEY for periods of one, three, six and twelve months. The three-month Jibar rate is widely used and accepted as a benchmark in the domestic financial markets. The Jibar is compiled on the basis of contributions received from nine commercial banks before 11h00, five of which are local banks and four local operations of foreign banks.
The JSE also distributes a spread sheet showing all bids and offers from all contributors through its data subscription system. All contributing banks are licensed and regulated by the SARB. The input required from contributors is bid and offer quotes on tradeable instruments issued by the contributing bank, such as negotiable certificates of deposit (NCDs).
The offer quote is where the bank will sell this tradeable instrument to a client wishing to invest in this instrument. The bid quote is where the bank will buy back its own paper from the investor holding the paper. The bid and offer rates submitted are averaged for each contributor to determine the mid rate.
These mid rates are then ranked and the top and bottom two midrates are removed from the list. The remaining mid rates are averaged to create the Jibar rates. The level quoted by the banks into the Jibar process is public information. This implies that if a bank is keeping its quotes in the Jibar quoting process lower than the "correct" level for the overall market and the credit quality of the issuing bank, the bank will be forced to buy back paper from the market as investors sell at the "incorrect" yield. Furthermore should the Jibar quotes not be reflective of where investors are actually trading with the quoting bank, investors will be able to determine this and could lodge a complaint with the JSE.
To date no such complaint has ever been received. Unlike Libor which represents an estimate by banks in the London market of the rates at which they believe they could borrow funds between each other, the Jibar rate is based on interest rates at which South African banks buy and sell their own NCDs, and represent actual rates which can be traded in the money market.
The SARB initiated a review in 2011 of the processes and procedures around the determination of domestic money market reference rates, including the Jibar. This was done under the auspices of the Financial Markets Liaison Group (FMLG), which is chaired by Deputy Governor Daniel Mminele.
This review process was initiated proactively as part of the normal work programme of the FMLG and its sub-committees to ensure the continued integrity and reliability of money market benchmark rates, and was not triggered by any event or development in the domestic financial markets or as a result of any problems encountered or suspected. The review is still in progress and once completed, the findings will be made public. It is expected that the review process will culminate in a Code of Conduct for banks contributing to the calculation of Jibar.
The FMLG review project is expected to be completed by the end of August 2012, following which its findings and recommendations will be made public. Regulators remain committed to ensuring sound and well-regulated processes to calculate, publish and monitor reference money market rates in the domestic financial market.