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What Does 2024 Hold for the South African Derivatives Markets?




As we move into 2024, there are some key developments and regulatory deadlines which should be on your radar.

 

A.     Initial Margin readiness

With Variation Margin having been implemented across the market in 2023 in terms of the Joint Standard 2 of 2020, the focus is likely to shift to Initial Margin readiness ahead of the 1 September 2024 deadline. This applied to entities whose aggregate month-end average gross notional amount of OTC derivatives for March, April, and May 2023 exceeded R15 trillion.


The to-do list for these entities would include:

  1. Ensuring they have an Initial Margin calculation methodology which is approved by the regulator. If the entity intends to use the SIMM calculation methodology as published by ISDA®, then approval from the regulator is required prior to implementing this methodology.

  2. Ensuring they have established a relationship with a custodian and signed up to all the relevant legal agreements to set up the collateral management arrangements.

  3. Identifying who their in-scope counterparties will be for this phase of Initial Margin implementation. This is usually ascertained by completing an ISDA®-published self-disclosure letter. Monitoring the Initial Margin exposures with these entities is then required. As the Initial Margin exposure approaches the regulatory Initial Margin threshold of R500m, the relevant collateral transfer agreements and security agreements should be concluded with those counterparties.

  4. Identifying what collateral assets the parties will exchange for Initial Margin purposes – this will need to be agreed to in the relevant eligible collateral schedules. From an operational and liquidity perspective, parties will need to manage and ensure they have access to the eligible types of collateral assets. This may require looking at implementing collateral optimisation solutions.

 

Those entities which fall into the last phase of Initial Margin implementation on 1 September 2025 (which would apply to those entities whose aggregate month-end average gross notional amount of OTC derivatives for March, April, and May 2025 exceed R100 billion) will also need to start preparing for compliance to the Initial Margin regulations. Much of this process will involve operational set-up and testing calculation methodologies, data feeds, collateral valuations and interactions with the appointed custodian.  

 

B.     Collateral management

With the implementation of the Taxation Law Amendment Act on 1 January 2023, the securities transfer tax exemption in respect of a ‘collateral arrangement’ was restricted in terms of the right of use of collateral securities. As a result, market participants will need to continue to be vigilant about managing non-cash collateral and how those assets are used in order to ensure no unintended tax consequences are incurred. This will require close monitoring and management of non-cash collateral assets, and may result in participants preferring the use of cash collateral.

 

As the market feels the added pressure of having to provide collateral in order to enter into various different transactions (in terms of the collateral regulations), collateral management and collateral optimisation solutions are going to have to become a key area of focus. Ensuring access to a pool of collateral assets which are eligible in terms of the regulations will require constant monitoring and management.

 

C.    Bank resolution

A framework for resolution of banks was established under Chapter 12A of the Financial Sector Regulations Act, 2017 and through Prudential Standard RA01 (Stays on Early-Termination Rights and Resolution Moratoria on Contracts of Designated Institutions in Resolution), and Prudential Standard RA02 (Transfers of Asset and Liabilities of a Designated Institution in Resolution).

 

These standards provide for a bank resolution framework in South Africa which will become effective on or about 1 June 2024. The RA01 standard will require parties to a ‘covered contract’ (where one party is a bank) to agree to be bound by temporary stays imposed by the SARB on the exercise of early-termination rights or resolution moratoria. It will be necessary to make specific provision for South African resolution stays in the relevant contracts which are governed by a law other than SA law.

 

ISDA® have published a South African module to the Resolution Stay Jurisdictional Modular Protocol. Provided both parties to the covered contract sign this module to the protocol, the resolution provisions will be incorporated into the relevant contracts. If parties do not adhere to the protocol, then bilateral amendment agreements will need to be signed between the affected parties in respect of their impacted contracts.

 

D.    Transition from Jibar to Zaronia

The SARB has announced that South Africa will transition away from the widely used Johannesburg Interbank Average Rate (JIBAR) to a risk-free interest rate called the South African Rand Overnight Index Average (ZARONIA). Banks will need to ascertain how the transition will impact their clients, systems, and contracts in the lead-up to the cessation of Jibar which is anticipated to be in September 2025.


Steps institutions will need to take to prepare for this transition include:

1.     System readiness - making adjustments to the systems that calculate interest

  • Finalising the method for transitioning Jibar-linked derivatives contracts by adjusting spreads for each relevant tenor

  • Developing standard conventions for the cash market and derivatives markets

2.     Repapering contracts - identifying if any contracts reference Jibar

  • What effect will the discontinuation of the Jibar have on the operation of the contract?

  • For contracts with no fallback rate, actively re-negotiating to include fallbacks

  • For existing agreements that reference Jibar beyond the cessation date of Jibar, incorporating a fallback position to Zaronia

  • New contracts should reference Zaronia

  • Amending existing contracts to reference Zaronia

3.     Re-Pricing transactions

  • Establishing the differences between the Jibar and Zaronia that could impact the profitability or costs associated with the identified contracts

  • Does Zaronia need to be adjusted (e.g. by the addition of a spread) to maintain the anticipated economic terms of existing Jibar contracts?

  • Calculating if there is compensation payable on existing contracts where Jibar contracts transition to Zaronia.


These are all large-scale regulatory projects that require input from various different teams within institutions and across many different sectors of the industry.


DeriviDoc is experienced and knowledgeable in how to manage and implement these projects, and is available to offer consulting, project management and training services to the market on any of these key projects.


See all our courses on offer here. The following courses will be of particular significance in 2024:

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