Tough Transition? How The Bond Market Should Prepare For JIBAR Cessation

The transition from the Johannesburg Interbank Average Rate (“JIBAR”) to the South African Rand Overnight Index Average (“ZARONIA”) is now firmly underway, presenting participants in the bond market with a series of pressing practical challenges. Chief among these are the treatment of legacy instruments referencing JIBAR upon cessation of the benchmark; the implications of the proposed legislative framework for existing noteholders and their contractual entitlements; and the steps that issuers and arrangers should proactively take to ensure an orderly transition.

Background

The global benchmark reform movement, which saw the replacement of the London Interbank Offered Rate with risk-free rates in major jurisdictions, has now reached South Africa. JIBAR, a forward-looking term rate based on indicative quotes from a panel of banks, will soon be replaced by ZARONIA, a backward-looking overnight near-risk-free rate based on actual transactions in the wholesale overnight deposit market. ZARONIA will serve as the primary reference rate for rand-denominated financial instruments, including floating-rate bonds, syndicated loans and derivatives.

Because ZARONIA is a backward-looking overnight rate, it does not incorporate the credit risk inherent in JIBAR. The Credit Adjustment Spread (“CAS”) must therefore be applied when transitioning legacy contracts so as to preserve economic equivalence between the outgoing and incoming benchmarks. Financial institutions are required to cease originating new JIBAR-linked products by 1 May 2026. For the bond market, this creates a dual challenge: (i) ensuring new issuances reference ZARONIA; and (ii) addressing the significant stock of outstanding JIBAR-linked bonds that must be actively amended or rely on a legislative backstop.

Breakdown of the amendment bill

• Overview and purpose

The General Finance Laws (Official Benchmarks and Procurement) Amendment Bill, 2025 (“Amendment Bill”) seeks to amend the Finance Sector Regulation Act of 2017 to enable the South African Reserve Bank (the “SARB”) to manage the discontinuation of official benchmarks. The Amendment Bill aims to create a legislative backstop for contracts that cannot be transitioned through private agreement before JIBAR ceases to be published. It empowers the SARB to: (i) designate replacement benchmarks for discontinued benchmarks; (ii) determine the CAS to be applied to the replacement benchmark in order to minimise economic prejudice; and (iii) determine and designate the date from which the replacement benchmark applies (1 January 2027 for ZARONIA).

• Scope of the legislative fallback

A critical nuance has emerged from the SARB’s Market Practitioners Group internal discussions on the scope of the Amendment Bill. Under Section 31D(1), the legislative fallback applies only to categories of legacy contracts that the SARB has specifically identified and designated by notice under Section 31C(3)(a). Draft notices are being prepared for four categories, namely: bonds, retail home loans, securitisations, and structured notes. Within those categories, the fallback covers instruments that contain no fallback provisions, or have fallbacks that do not identify a specific replacement benchmark or determining person, do not provide for a permanent replacement of the discontinued benchmark, or require third-party consent not obtained by the cessation date. Fallbacks based on a discontinued benchmark or requiring non-administrator polls for interbank lending rates are disregarded. Critically, the Bill provides no catch-all legislative solution for contracts falling outside the designated categories; those contracts must be transitioned actively or passively. This represents a significant divergence from the draft Transition Approaches Paper, which contemplated the legislative provisions applying automatically to all legacy JIBAR contracts lacking robust fallbacks, without limitation by asset class.

The Amendment Bill also provides for synthetic benchmarks as a temporary stability mechanism for certain tough legacy contracts that cannot be readily transitioned to the new benchmarks. These synthetic benchmarks operate as a regulated bridge mechanism designed to prevent contracts from failing and to avoid unnecessary litigation.

• Application

Several important clarifications emerged from the public consultation process on the Amendment Bill. The SARB confirmed that the benchmark replacement framework applies to any contract referencing a South African official benchmark, irrespective of counterparty location, implying that cross-border contracts are within scope, with South African regulated entities bearing the regulatory onus to ensure compliance. The benchmark transition framework is also intended to facilitate benchmark conforming changes without requiring consent from all parties in complex multi-party arrangements, whilst still respecting their contractual rights. This is especially relevant to bond programmes where the bondholder consent process can be complex and time-consuming.

• Practical effect and recommended approach

For instruments that fall within the ambit of the Amendment Bill, the practical effect is quite significant. The SARB-designated replacement benchmark (together with the designated adjustment spread and any technical conforming changes) will apply by operation of law, without the need for amendments, consents, or investor approvals, and without triggering default or termination rights.

While the legislative backstop provides a necessary safety net, it should not be treated as a default strategy. An active transition to ZARONIA remains the preferred approach, with passive transition offering the next-best path forward.

Way forward for the bond market

The bond market has been slow to adopt the new reference rate and seems to have adopted a “wait and see” approach, pending legislative clarity and operational readiness.

Despite the cautious stance, infrastructure for issuer-led transition is being put in place. The JSE has released a formal communication on how it intends to support conversions driven by issuers. The JSE intends to enhance its reference data by adding new fields including adjustment spread, lookback period, day count conversions, and business day conversions. The JSE will also update reference rate fields from JIBAR to ZARONIA for converted instruments and track conversions in real time, which will provide market transparency as instruments transition during 2026.

Bond issuers and investors should also consider several practical steps as the cessation date looms closer:

1. A comprehensive portfolio audit should be undertaken to identify all JIBAR-linked bond exposures and assess whether existing contractual fallback provisions are sufficiently robust or whether active amendment is needed, or whether they fall within the scope of the Amendment Bill’s automatic transition mechanism. Where money market instruments are not captured within the scope of the bonds notice, consideration should be given to including them as a separate asset class.
2. Issuers opting for an active approach over the legislative backstop should initiate structured discussions with noteholders and trustees in advance to amend legacy instruments. Given the protracted nature of consent solicitation in the bond market, early engagement is essential to complete the transition in time.
3. Bond market participants should keep abreast of developments with the legislative process. The SARB has expressed that the Amendment Bill will be fast-tracked and promulgated before the end of the JIBAR transition period. Despite this, the Amendment Bill must still make its way through the required parliamentary committees, the National Assembly, and the National Council of Provinces. Any objections or changes to the Amendment Bill during this process could delay the promulgation date.

The legislative fallback approach aims to facilitate timely amendments, though it cannot possibly address every contract type imaginable. The notices being prepared therefore target specific categories representing the bulk of the market and those most difficult to transition actively, such as bonds which require consent solicitation.

Conclusion

JIBAR cessation is no longer a future event, it has an execution deadline. The bond market finds itself at a crossroads where participants will either be caught up in the legislative backstop or take proactive steps to negotiate and implement amendments on terms within the parties’ control. Each approach carries its own risks and advantages, and the right strategy will depend on the specific terms set out in each instrument and the issuer’s broader transition programme. What is clear is that the window for the “wait and see” approach is rapidly closing. Bond market participants who act decisively and engage early with the legal and operational dimensions of the transition will be best positioned to navigate the JIBAR transition with confidence.

Our banking and finance team remains at the forefront of developments regarding the JIBAR transition. Please do not hesitate to contact us should you have any queries.

To assist market participants in navigating the JIBAR transition with confidence, we have prepared a comprehensive JIBAR transition playbook which provides practical guidance on transition essentials, ZARONIA conventions and compounding methodologies, active and passive transition strategies, commentary on the various MPG template agreements, and a comprehensive market participants checklist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.