Abstract
ZARONIA is poised to replace JIBAR as the primary reference rate for ZAR-denominated financial products, influencing trillions of rand in outstanding notional value. This transition necessitates a robust methodology for constructing a ZARONIA Overnight Forecasting Curve, ensuring alignment with market expectations and regulatory standards.
This paper outlines a novel approach to building the ZARONIA curve, leveraging the existing JIBAR 3-month curve as a foundation. The methodology consists of two key components:
- Front-End Construction: Developing the short-term portion of the ZARONIA curve by applying the historical spread between ZARONIA Overnight and JIBAR 3-month rates.
- Back-End Alignment: Constraining the long-term portion of the curve to align with no-arbitrage conditions dictated by Tenor Basis Swap Fallback Spreads. A backward induction technique is employed to ensure consistency across Tenor Basis Swaps.
This approach enables the ZARONIA curve to effectively incorporate short-term event risks, such as MPC announcements embedded within the JIBAR 3-month curve, while maintaining long-term no-arbitrage pricing, consistent with Fallback Spreads. These Fallbacks create triangular constraints, ensuring that even JIBAR Tenor Basis Swaps (e.g., JIBAR 1m vs. JIBAR 3m) PAR rates remain bounded by these spreads.
Finally, the analysis explores potential challenges in South Africa’s transition, particularly the implications if CSA collateral remuneration rates fail to migrate to ZARONIA Overnight.
Key Takeaways for Market Participants
- Practical strategies for navigating the emerging ZARONIA derivatives market.
- Insights into assessing the fairness and implications of transitioning from JIBAR-based to ZARONIA-based contracts.
This methodology offers a comprehensive framework to support market participants through the transition, ensuring consistency, transparency, and adaptability in ZARONIA-based financial products.