## EXECUTIVE SUMMARY

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### Financial Market Liquidity and Development
- General assessment:
  - South African financial markets are the most developed and liquid in Africa and well developed by global standards.
  - Foreign exchange market turnover is consistently among the top 20 in the world (BIS triennial survey).
  - Government bond and interest rate swap yield curves extend to 20 years.
- Size and depth:
  - Domestic bond market is around 85 percent of GDP.
  - Stock market capitalization is about 300 percent of the GDP.
- Market participation and vulnerabilities:
  - 30.1 percent of government bonds held by non-residents as at June 2021 (down from a peak of 42.8 percent in 2018).
  - Around half of the market value of JSE-traded equities are in foreign hands.
  - Rand weakened close to 30 percent during COVID-19; 10 year government bond yield jumped by 3.5 percentage points into double digits in less than a month.
  - Banks’ funding: corporate and institutional funding plus smaller retail base make up around 70 percent of total funding.
- Money market structure and frictions:
  - Negotiable Certificate of Deposits (NCDs): outstanding amount 362 billion rand in June 2021; more than 80 percent were floating rate notes; issued up to 8-year maturity (sometimes longer); main issuers are the five largest banks.
  - Interbank market relies primarily on unsecured transactions; preference due to very short-term nature of transactions and perceived negligible credit risk.
  - Secured transactions concentrated among securities dealers and a few big banks; weekly roll up to 100 billion rand.
  - Most secured transactions take the form of buy-sell back (B/S) repos rather than classic repos; local tax treatment favors B/S repos; high proportion reportedly undocumented.
  - JSE margin requirements can only be fulfilled with cash, tying up between 45–50 billion rand (including derivatives contracts).
  - Treasury bills (T-bills): outstanding around 450 billion rand; secondary market underdeveloped; T-bill yields rose 25–30 basispoints above respective NCD yields for several months during COVID-19.
  - FX and FX swap market: domestic banking sector’s exposure to foreign-currency loans and funding below 10 percent of total liabilities at end-2020; local regulation limits net foreign-currency positions to 25 percent of equity; average net open foreign currency position to capital averaged between 0.5 –1.5 percent in recent years.
- Market infrastructure gaps:
  - No central clearing counterparty for OTC derivatives.
  - Collateral divided into separate pockets (Strate accounts, SARB account, SARB’s separate pools for monetary operations, CLF, prudential purposes); movement between pockets cumbersome.
  - Strate’s Clearstream triparty repo platform operationally prepared to support greater interoperability and collateral substitution.
  - SABOR calculation mixes secured and unsecured rates and has data collection and validation issues relative to IOSCO Principles.

### Benchmark Money Market Interest Rates and Indices (Box 1 highlights)
- Main benchmarks:
  - Sabor (South African Benchmark Overnight Rate): calculated by SARB as a volume-weighted average of overnight funding; composed of three elements with weights 95 percent to first 2 elements and 5 percent to the third.
  - JIBAR (Johannesburg Interbank Average Rate): compiled by JSE from quoted live NCD rates by five contributing banks (Standard Bank, Absa, FirstRand, Nedbank, Investec); calculated for 1, 3, 6, 9 and 12-month maturities.
  - STeFI (Short-Term Fixed-Interest Index): Alexander Forbes STeFI Composite Index; non-tradable benchmark for money market portfolios; composition: Sabor 15 percent, 3-month NCD 30 percent, 6-month NCD 35 percent, 12-month NCD 20 percent.
- Issues and transition intent:
  - Sabor mixes secured and unsecured rates; does not satisfy IOSCO Principles for Financial Benchmarks; recommendation to renew Sabor based on interbank unsecured overnight transactions and strengthen governance.
  - JIBAR renewed in April 2021 to be based on live quotations and strengthened governance; current contributor eligibility limited to the big five banks.
  - STeFI contains bank risk only (85 percent NCD rates, 15 percent Sabor); lack of a risk-free money market benchmark noted; promote T-bill benchmark indices in 1, 3, 6 and 12-month maturities when reliable market making begins.
  - Consider introducing a benchmark interest rate curve beyond one year based on interbank interest rate swap quotations (JIRS).

### SARB’s Operational Framework in Normal Times
- Objectives and operational target:
  - SARB primary objective: protect the value of the South African currency in the interest of balanced and sustainable economic growth; additional objective to protect and maintain financial stability.
  - Inflation targeting since 2000; inflation target currently 3–6 percent for headline CPI with MPC emphasizing closing to the 4.5 percent midpoint.
  - Operational target historically: a predetermined liquidity shortage achieved via cash reserve requirement system, open market operations (SARB debenture and reverse repo auctions), FX swaps and moving public sector funds between the market and SARB.
- Instruments and parameters:
  - Main refinancing operation: weekly 7-day repo auction with rate fixed at the SARB repo rate; typical targeted systemic liquidity shortage around 56 billion rand pre-COVID.
  - SARB debentures issued weekly in 7, 14, 28, and 56-day maturities; debentures qualify as statutory liquid assets.
  - Overnight standing facility deposit and lending rates set 100 bp below and above the repo rate, respectively.
  - Minimum reserve requirement ratio for banks: 2.5 percent; reserve maintenance period: one month (15th business day to 14th business day).
- Assessment and recent stresses:
  - Pre-COVID framework served SARB well: Sabor kept very close to repo rate; 3-month JIBAR moved in line with policy rate.
  - COVID-19 structural liquidity shifted into surplus due to conversion of IMF and other foreign currency loans (around 65 billion rand), SARB’s government securities purchase program (more than 30 billion), use of part of NT sterilization deposit account (26 billion), and Loan Guarantee Scheme.
  - SARB lowered its liquidity shortage target to 30–35 billion rand in reaction.
  - Extensive use of FX swaps for sterilization led to implied rand rates spiking on maturities below one year and deviating from the SARB repo rate; banks faced challenges meeting rand LCR requirements because FX-swap FX does not count as rand HQLA.
- Transparency and balance-sheet issues:
  - Recommendation to timely report outstanding amounts of all monetary instruments in line with IMF Central Bank Transparency Code.
  - SARB responsible for investments of the Corporation for Public Deposits (CPD), a quasi-fiscal function complicating liquidity management and decreasing transparency.
  - CPD investments should be handled separately and integrated into National Treasury’s cash management framework.

### Corporation for Public Deposits (Box 2)
- Role and structure:
  - CPD established as SARB subsidiary in 1984; governed by Corporation for Public Deposits Act 46 of 1984.
  - Accepts call deposits from the public sector and invests in short-term money-market instruments and special Treasury bills; funds payable on demand.
  - SARB responsible for investments and daily administration; FMD carries out actual market investments.
  - CPD liabilities primarily deposit accounts; margin accounts of ETP also placed at CPD.
- Size and solvency concerns:
  - In Q1 2020, balance sheet around 70 billion rand.
  - Operating cost about 4 million rand.
  - 2020 Financial Statements: significant increase in credit risk to the value of R2.3 billion rendered CPD technically insolvent as liabilities exceed assets; SARB issued a guarantee in favor of CPD to the value of R3.45 billion.
- Risk and governance issues:
  - CPD portfolio management exposes SARB to credit risk and potential conflicts with SARB Act provisions limiting lending without adequate collateral.
  - Recommendation: harmonize CPD’s money market placements with SARB liquidity management and integrate CPD into NT cash management framework.

### Management of Liquidity in Times of Stress and Emergency Liquidity Assistance (ELA)
- Legal and institutional framework:
  - SARB Act grants wide lending powers including ELA but lacks specific ELA provisions; recommended amendment to formalize objectives and preconditions.
  - August 2020: Financial Stability Committee adopted new Framework for the Provision of Emergency Liquidity Assistance to Banks, designed primarily for lending in resolution and covering only systematically important banks.
  - Need to flesh out ELA for solvent but temporarily illiquid banks and potentially non-bank financial institutions outside resolution.
- Inter-agency arrangements:
  - SARB, PA and NT exchange information regularly; PA representatives are members of the Financial Stability Committee; SARB representatives are members of the Prudential Committee.
  - No formal MoU currently exists between SARB, PA and NT concerning cooperation in case of an ELA request; recently accepted internal guidelines delineate roles and responsibilities.
- ELA eligibility, terms and operational preparedness:
  - ELA framework primarily designed for systemically important domestic banks; extension to NBFIs and branches of foreign banks only in specific cases.
  - Guidelines leave wide discretion on interest rate and tenor; only specification is that ELA should not be subsidized.
  - No recent simulation exercises undertaken by SARB and PA to test ELA procedures.
- Collateral and prepositioning:
  - CLF aided mobilization of non-standard collateral; ELA Framework adds use of performing loans less portfolio credit impairments.
  - Prepositioning capabilities should be retained so banks can mobilize non-standard collateral timely.
- Foreign currency and reserves:
  - SARB does not have a Fed FX swap line but has access to the Fed’s FIMA Repo Facility.
  - Bilateral swap facility with PBoC for the exchange of US$4.75 billion in local currency terms exists; not actively used.
  - Foreign reserves are USD 52 billion, above 6-month import cover and Guidotti-rule but below IMF’s ARA metric.
  - Recommendation to review intervention policy and adequate size of reserves at least annually as capital account liberalization proceeds.

### Detailed recommendations (selected, timing codes I, ST, MT)
- Money market development:
  - Harmonize regulatory, accounting and tax treatments of different types of collateral and repos; promote widespread use of classic repos under GMRA. (SARB, ST)
  - Improve collateral management by establishing interoperability between pools and increasing flexibility of collateral substitution. (SARB, Strate, MT)
  - Introduce market-making requirements for primary dealers on Treasury bills for selected maturities on the Electronic Trading Platform (minimum 1, 3, 6 and 12-month). (SARB, NT, PDs, JSE, Strate, I)
- Benchmarks and indices:
  - Renew Sabor calculation in line with IOSCO Principles by basing it on interbank unsecured transactions and strengthen governance framework. (SARB, ST)
  - Promote establishment of SA Treasury bill benchmark indices in 1, 3, 6 and 12-month maturities. (SARB, NT, ST)
  - Consider introducing benchmark interest rate curve beyond one year based on interbank interest rate swap quotations (JIRS). (SARB, NT, MT)
- SARB liquidity management and transparency:
  - Optimize monetary operations by using short-term interest rates as operational target instead of predetermined level of liquidity shortage. (SARB, ST)
  - Review all applied monetary policy instruments, phase out unused and superfluous instruments; use FX swaps only for FX liquidity or when rand-denominated collateral unavailable. (SARB, ST)
  - Gradually redirect NT’s rand liquidity from tax & loan accounts at commercial banks to its settlement account with SARB (Treasury Single Account) and pay market-conform interest above a certain working balance. (SARB, NT, MT)
  - Harmonize CPD’s money market placements with SARB liquidity management and integrate CPD into NT cash management framework. (SARB, NT, MT)
  - Increase transparency by providing aggregate and timely information about outstanding amounts of all liquidity management operations and prefer auction formats to bilateral transactions. (SARB, I)
- ELA legal, operational and testing measures:
  - Formalize legal framework for ELA through amendment of the SARB Act; include exhaustion of private sector liquidity, minimum capital adequacy or near-term expected compliance, sufficient collateral, capacity to repay; empower SARB to lend without collateral if government indemnifies SARB; confine lending ability to licensed and supervised entities or those designated as systemically important. (SARB, MT)
  - Extend ELA framework to solvent but temporarily illiquid banks outside resolution with technical clarity (eligible entities, lending rates, etc.). (SARB, PA, ST)
  - PA to set out internal guidance for solvency, liquidity and viability assessments for ELA purposes. (SARB, PA, ST)
  - Update MOUs between SARB, PA and NT to include ELA procedures; SARB and PA to jointly test ELA arrangements regularly. (SARB, PA, NT, ST/S)
  - SARB and PA to undertake regular testing and simulation of ELA arrangements, including mobilization of non-standard collateral and procedural simulations. (SARB, PA, NT, ST)

*Source: EXECUTIVE SUMMARY — 1zafea2022006*

### EXECUTIVE SUMMARY __________________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Financial Market Liquidity and Development
- Sections:
  - A. General Financial Market Development
  - B. Liquidity of the Money Markets
  - C. Benchmark Money Market Interest Rates and Indices
  - D. Detailed Recommendations
- Associated analytical content:
  - BOX 1: Calculation of the Main South African Benchmark Rates and Indices
  - FIGURE 1: Financial Markets Development
  - FIGURE 2: USD/ZAR Exchange Rate and SA Government Bond Yields During the COVID-19 Crisis
  - FIGURE 3: Developments in Monetary Policy Implementation
  - TABLE 2: Detailed Recommendations—Financial Market Liquidity and Development

### SARB’S OPERATIONAL FRAMEWORK IN NORMAL TIMES
- Sections:
  - A. SARB’s Standard Operational Framework
  - B. Assessment of the Efficiency of SARB’s Liquidity Management
  - C. Detailed Recommendations
- Associated analytical content:
  - BOX 2: Corporation for Public Deposits
  - TABLE 3: Recommendations—SARB Regular Liquidity Management Operations

### MANAGEMENT OF LIQUIDITY IN TIMES OF STRESS
- Sections:
  - A. Managing Idiosyncratic Liquidity Event—ELA
  - B. Managing System-Wide Liquidity Stress
  - C. Detailed Recommendations
- Associated analytical content:
  - BOX 3: Terminology—ELA versus LOLR
  - TABLE 4: Liquidity Events and Instruments
  - TABLE 5: Recommendations—Management of Liquidity in Times of Stress

### Cross-cutting deliverables and summary materials
- Executive Summary spans initial pages and organizes the report into three major thematic areas above.
- KEY REFERENCE TABLE:
  - TABLE 1: Key Recommendations on Systemic Liquidity Management
- The document includes a Glossary with the following acronyms (selected):
  - CB, CLF, CLS, CPD, CSA, ELA, ETP, FX, FMD, FMLG, FSAP, FSC, FSD, FSCF, FSOC, GFC, GMRA, IRS, JIBAR, LCR, LOLR, MOU, MPG, MRO, NCD, NSFR, NT, O/N, OTC, PA, PD, RPD, RPP, SABOR, SADC, SARB, SF, STeFI

*Source: EXECUTIVE SUMMARY — 1zafea2022006*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### A. Overview of South African Financial Markets
- South African financial markets are the most developed and liquid in Africa and well developed by global standards.
- Foreign exchange market turnover is consistently among the top 20 in the world according to the Bank for International Settlement (BIS) triennial survey.
- The government bond and interest rate swap yield curves go out to 20 years.
- Size and depth:
  - Domestic bond market is around 85 percent of GDP.
  - Stock market capitalization is about 300 percent of the GDP.
- Supporting infrastructure:
  - Real-time gross settlement system (SAMOS); regional cross-border RTGS; rand part of Continuous Linked Settlement (CLS) since 2004.
  - JSE serves as central clearing counterparty for exchange traded derivatives; no central clearing counterparty for OTC derivative trades.
  - Derivatives markets dominated by forward rate agreements and interest rate swaps.
  - ISDA Market Agreements with Credit Support Annex (CSA) and Global Repo Market Agreements (GMRA) are market standards; a significant portion of transactions between local banks and domestic counterparts are under-documented.
- Absa Africa Financial Market Index shows near perfect 99–100 score on market depth subcomponent; overall index pulled down by scores of 80 and 78 on access to foreign exchange and macroeconomic opportunities subcomponents.

### B. Systemic Liquidity Vulnerabilities and Market Dynamics
- Foreign participation and portfolio flows:
  - 30.1 percent of government bonds held by non-residents as at June 2021 (down from a peak of 42.8 percent in 2018).
  - Around half of the market value of JSE-traded equities are in foreign hands.
  - Rand is a popular carry-trade currency, increasing volatility of foreign positioning.
- COVID-19 episode:
  - Rand weakened close to 30 percent to a historic low.
  - 10 year government bond yield jumped by 3.5 percentage points, into double digits, in less than a month.
  - Timely SARB intervention in the government bond market was necessary to prevent further market disorder.
- Market segmentation and funding structure:
  - Banks mostly funded by corporate and institutional deposits; corporate and institutional funding plus smaller retail base make up around 70 percent of total funding.
  - Closed rand system obliges institutional investors to keep certain level of savings in rand, mitigating outflows.
  - Domestic money market dominated by the big five banks.

### C. Money Market Liquidity and Market Structure Issues
- Negotiable Certificate of Deposits (NCDs):
  - Outstanding amount of all NCDs was 362 billion rand in June 2021; more than 80 percent were floating rate notes.
  - NCDs issued up to 8-year maturity (sometimes longer); main issuers are the five largest banks.
- Interbank market:
  - Relies primarily on unsecured transactions, increasing credit risk and excluding banks with weaker credit standing.
  - Unsecured preference partly due to very short-term nature of transactions and perceived negligible credit risk.
  - New Prudential Authority directive may incentivize shift toward secured transactions to limit capital charges.
- Secured transactions and repo market:
  - Trading in secured transactions concentrated among securities dealers and a few big banks, particularly during the weekly roll (up to 100 billion rand at the weekly roll).
  - Short government bond repo rates are higher than unsecured interbank rates.
  - Most secured transactions take form of buy-sell back (B/S) repos rather than classic repos:
    - B/S repos are linked to specific collateral, complicating collateral substitution and margining.
    - Local tax treatment favors B/S repos over classic repos; a high proportion of B/S repos are reportedly undocumented, increasing legal risk in default.
- Collateral management inefficiencies:
  - Collateral divided into separate pockets (Strate accounts, SARB account, SARB’s separate pools for monetary operations, CLF, and prudential purposes).
  - Movement of securities between pockets is possible but cumbersome and slow due to manual processes.
  - Strate’s Clearstream triparty repo platform is operationally prepared to support greater interoperability and collateral substitution.
- JSE margining:
  - JSE margin requirements can only be fulfilled with cash, tying up between 45–50 billion rand (including derivatives contracts).
  - Accepting some securities as margin could free liquidity for money markets; JSE is examining options.
- Treasury bills (T-bills):
  - Outstanding amount of T-bills around 450 billion rand.
  - Secondary market underdeveloped: no market-making arrangements despite presence of primary dealer (PD) system, resulting in lack of reliable daily closing prices and no performance benchmark indices for different T-bill maturities.
  - Most T-bills held by banks to comply with liquid asset requirement (LAR) and liquidity coverage ratio (LCR) and for use as collateral in SARB refinancing operations—leading banks to buy-and-hold and dampening trading interest.
  - During COVID-crisis, T-bill yields rose 25–30 basispoints above respective NCD yields for several months, increasing government liquidity premium.
- FX and FX swap market:
  - Domestic banking sector’s exposure to foreign-currency loans and funding was below 10 percent of total liabilities at end-2020; foreign-currency funding risk considered low.
  - Local regulation: banks cannot hold net foreign-currency positions greater than 25 percent of equity.
  - Average net open foreign currency position to capital averaged between 0.5 –1.5 percent in recent years.
  - FX swap market is liquid but not necessarily deep; SARB active in FX swaps to provide FX liquidity and currently uses FX swaps also to manage rand liquidity—large operations can cause volatility in implied rand interest rates.
- Market infrastructure gaps:
  - No central clearing counterparty for OTC derivatives.
  - Room for further development in collateral management (e.g., tri-party arrangements).
  - Sabor calculation mixes secured and unsecured rates and has technical data collection and validation issues relative to IOSCO Principles for Financial Benchmarks.

### D. Benchmark Interest Rates and Indices
- Main money market benchmarks:
  - Sabor (South African Benchmark Overnight Rate): composite of several money market rates; basically the only O/N benchmark rate; calculated by SARB.
  - JIBAR (Johannesburg Interbank Average Rate): reflects funding costs of big 5 banks; available in 1, 3, 6, 9 and 12-month maturities; compiled and published by JSE.
  - STeFI (Short-Term Fixed Income Index): non-tradable composite index used for benchmarking money market investment portfolios; consists of Sabor and different maturity NCD rates.
- Issues and proposals:
  - Sabor plays important role in monetary transmission but does not satisfy new IOSCO Principles for Financial Benchmarks because it mixes secured and unsecured rates; requires data collection and governance improvements.
  - Recommendation to renew Sabor calculation in line with IOSCO Principles by basing it on interbank unsecured transactions and strengthening governance (see recommendations).

### E. SARB Monetary Policy Operational Framework and Liquidity Management
- Pre-set liquidity shortage operational framework served SARB well historically but revealed inadequacies during COVID-19 due to suddenly increased liquidity surplus and inadequate instruments.
- Transparency improvements:
  - Timely reporting of outstanding amounts of all monetary instruments recommended in line with the IMF Central Bank Transparency Code.
  - Increase transparency by providing aggregate and timely information about outstanding liquidity management operations and preferring auction formats to bilateral transactions.
- Operational changes underway:
  - SARB is in the process of shifting its operational target to short-term interest rates; transition requires a thorough review of the whole applied monetary policy operational framework.
- Instrument use:
  - Review all applied monetary policy instruments, phase out unused/superfluous instruments. Use FX swaps only for managing FX liquidity or in the lack of rand denominated collateral.
- SARB’s balance sheet and CPD:
  - SARB responsible for investments of the Corporation of Public Deposits (CPD), a quasi-fiscal function complicating liquidity management and decreasing transparency of SARB monetary operations.
  - CPD investments should be handled separately and fully integrated into National Treasury’s cash management framework to keep SARB’s balance sheet immune from CPD credit-related losses.

### F. National Treasury (NT) Cash Management Issues
- NT holds almost all operational rand liquidity at the four big banks, creating systemic risks:
  - NT balances volatile and large, ranging from 50–250 billion rand, complicating banks’ liquidity management.
  - Keeping deposits in commercial banks exposes the government to very high credit risk and creates potential moral hazard by making these banks too important to fail.
- Recommendation:
  - SARB and NT should consider gradually concentrating NT’s liquidity directly in SARB.
  - NT may consider setting up a treasury single account at SARB for public finance management purposes, in line with international best practice, to reduce government credit risk toward largest banks, decrease operational risk of government cash management, alleviate four big banks’ daily liquidity management, and contribute to equal treatment of financial institutions.

### G. Emergency Liquidity Assistance (ELA) and Legal/Operational Framework
- SARB Act grants wide lending powers for central banking purposes, including ELA, but should be revised to clarify objectives and criteria for granting ELA.
  - Lack of specific ELA provisions and wide empowerment leaves too much discretion at technical levels and may expose staff to outside pressure to support entities that do not meet preconditions for ELA (e.g., not systemically important or already insolvent and not viable).
- Developments and gaps:
  - August 2020: Financial Stability Committee adopted a new Framework for the Provision of Emergency Liquidity Assistance to Banks, designed primarily for lending in resolution (or near-resolution) situations and covering only systematically important banks.
  - Further attention needed to flesh out ELA framework for solvent but temporarily illiquid banks and potentially non-bank financial institutions outside of resolution.
- Recommended actions:
  - Amend SARB Act to formalize legal framework for ELA, including specific objectives and preconditions.
  - Extend SARB’s ELA framework to include exceptional liquidity support to solvent but temporarily illiquid banks outside of resolution with clarity on technical details (eligible entities, lending rates, etc.).
  - Prudential Authority (PA) to set out internal guidance to undertake solvency, liquidity and viability assessments to the satisfaction of SARB for ELA purposes.
  - Update MOUs and formal arrangements between SARB, PA, and NT to include references to procedures in ELA situations.
  - SARB and PA to jointly undertake regular testing of ELA arrangements.

### H. Key Recommendations (summary mapped to timing)
- Money Market Development:
  - Harmonize regulatory, accounting and tax treatments of different types of collateral and repos; promote wide-spread use of classic repos under GMRA. (SARB, ST)
  - Improve collateral management by establishing interoperability between pools and increasing flexibility of collateral substitution. (SARB, Strate, MT)
  - Introduce market-making requirements for primary dealers on Treasury bills for selected maturities on the Electronic Trading Platform (ETP). (SARB, NT, PDs, JSE, Strate, I)
- Benchmark Interest Rates and Indices:
  - Renew Sabor calculation in line with IOSCO Principles by basing it on interbank unsecured transactions and strengthen governance framework. (SARB, ST)
  - Promote establishment of SA Treasury bill benchmark indices in 1, 3, 6 and 12-month maturities. (SARB, NT, ST)
  - Consider introducing benchmark interest rate curve beyond one year based on interbank interest rate swap quotations. (SARB, NT, MT)
- SARB Liquidity Management Operations:
  - Optimize monetary operations by using short-term interest rates as operational target instead of predetermined level of liquidity shortage. (SARB, ST)
  - Review all applied monetary policy instruments, phase out unused and superfluous instruments. Use FX swaps only for FX liquidity or lack of rand-denominated collateral. (SARB, ST)
  - Gradually redirect NT’s rand liquidity from tax & loan accounts at commercial banks to its settlement account with SARB (Treasury Single Account) and pay market-conform interest above a certain working balance. (SARB, NT, MT)
  - Harmonize CPD’s money market placements with SARB liquidity management and integrate CPD into NT cash management framework. (SARB, NT, MT)
  - Increase transparency by providing aggregate and timely information about outstanding amounts of all liquidity management operations and prefer auction format to bilateral transactions. (SARB, I)
- Management of Liquidity in Times of Stress:
  - Formalize legal framework for ELA through amendment of SARB Act. (SARB, MT)
  - Extend ELA framework to solvent but temporarily illiquid banks outside of resolution with technical clarity. (SARB, PA, ST)
  - PA to set out internal guidance for solvency, liquidity and viability assessments for ELA. (SARB, PA, ST)
  - Update MOUs between SARB, PA and NT to include ELA procedures; SARB and PA to jointly test ELA arrangements regularly. (SARB, PA, NT, ST/S)

*Source: EXECUTIVE SUMMARY, 1zafea2022006.*

### Box 1. Calculation of the Main South African Benchmark Rates and I ndices

### Box 1. Calculation of the Main South African Benchmark Rates and Indices

### Sabor—South African Benchmark Overnight Rate
- Sabor is currently calculated as a volume-weighted average interest rate of overnight funding.
- The SARB, as a calculation agent, determines and publishes Sabor on a daily basis, based on transactions the day before.
- Sabor is compiled using three different interest rate elements:
  - the interest rate paid on overnight funding in the interbank market (excluding any funding at the repo rate);
  - the interest rate paid on call deposits of each contributing bank’s top 20 non-bank clients (excluding deposits with a fixed link to the prime rate and other term rates);
  - interest rates paid on overnight and tomorrow/next day rand funding in the FX swap market (the implied rand interest rate).
- Weighted average rates are calculated separately from the first 2 element and the third one.
- In the last step, Sabor is calculated by giving 95 percent weight to the first 2 elements and 5 percent weight to the third one.

### JIBAR—Johannesburg Interbank Average Rate
- JIBAR is constructed daily using quoted live rates for NCDs on Refinitiv/Bloomberg by the 5 JIBAR contributing banks: Standard Bank, Absa, FirstRand, Nedbank, and Investec.
- Quoted rates should be good for a trade size of between R20 million and R500million, for NCD issuances of up to and including 12 months and settling within seven business days following the trade date.
- The recommended spread under normal conditions should be a maximum of 25 basis points (in practice it is mostly 15 bp).
- The JIBAR rates are determined between 9.15 and 9.45 am and published at 10.00 am.
- The highest and lowest 25 percentile of the mid-rates are excluded from the calculation (in practice the 1-1 highest and lowest mid-rates out of the 5).
- The remaining bid and offer interest rates are averaged to calculate a mid-rate.
- JIBAR rates are calculated for 1, 3, 6, 9 and 12-month maturities, with the 3-month being the most widely used.
- JIBAR is compiled and published by the JSE (the calculation agent). SARB is the administrator of JIBAR.

### SteFI—Short-Term Fixed-Interest Index
- The Alexander Forbes Short-term Fixed Interest (STeFI) Composite Index is a benchmark index constructed by Alexander Forbes, calculated and published daily by the South African Futures Exchange (SAFEX) since

*SOUTH AFRICA     INTERNATIONAL MONETARY FUND    13*

### 2000. SteFI is a  non-tradable index used for benchmarking money market  portfolios. It consists of Sabor

### 2000. SteFI is a non-tradable index used for benchmarking money market portfolios. It consists of Sabor

### STeFI composition and market role
- STeFI composition:
  - Sabor: 15 percent
  - 3-month NCD rate: 30 percent
  - 6-month NCD rate: 35 percent
  - 12-month NCD rate: 20 percent
- Usage:
  - Primary benchmark for almost 16 percent of the number of collective investment scheme (CIS) funds domiciled in South Africa.
  - Represents 29.4 percent of funds invested in South African-domiciled CISs (SARB Consultation Paper on Selected Interest Rate Benchmarks, 2018).
- Characteristics and linkage:
  - STeFI contains only bank risk (85 percent NCD rates, 15 percent Sabor).
  - Sometime also referred to as Johannesburg Interbank Agreed Rate.

### JIBAR, JIRS, and related benchmarks
- JIBAR:
  - Corresponds to NCD rates and is an important indicator of banks’ funding rate.
  - Most interest rate derivatives in South Africa are linked to JIBAR; around two-third of these derivatives are forward rate agreements.
  - SARB’s 2017 data: outstanding notional amount of derivatives reset against JIBAR was 38 trillion rand; non-derivative assets and liabilities reset against JIBAR was close to 2 trillion rand.
  - Renewed JIBAR setting is now based on live quotations on increased transaction amounts and a strengthened governance framework (April 2021), aligned with the IOSCO Principles for Financial Benchmarks.
- JIRS and longer-term benchmarks:
  - The IRS curve more closely reflects banks’ longer-term funding cost than the government bond curve.
  - In South Africa, the IRS curve is way below the government yield curve and the spread between the two curves exhibits high volatility.
  - The IRS market shows sufficient liquidity for the establishment of a daily reference rate curve (Johannesburg Interest Rate Swap rate, JIRS), which could be used to price longer-term loans and increase transparency.

### Financial stability and market risks
- Interconnectedness and concentration:
  - Most money market funds benchmarked to STeFI create incentives for asset managers to invest in bank assets, increasing interconnectedness between banks and investment funds.
  - According to SARB, 90 percent of money market funds’ assets were invested in instruments issued by banks at the end of 2016.
- Lack of risk-free money market benchmark:
  - Absence of a risk-free benchmark money market index creates potential financial stability risk.
  - A risk-free money market benchmark constructed using T-Bill rates could mitigate these risks, but reliable benchmark compilation is hindered by lack of organized market making and credible daily closing prices.
- Contributor eligibility and market depth:
  - Current JIBAR limitation: only the big five banks are eligible as contributors.
  - SARB found the volumes of underlying three-month NCD markets are not high enough and JIBAR was previously based on indicative prices, not actual transactions.

### SARB actions, consultations, and transition plans
- Institutional efforts:
  - Reference Rate Working Group (RRWG) set up in 2011; Jibar Code of Conduct, Governance Process and Operating Rules released in March 2013.
  - Proposals regarding Sabor and Jibar tabled at Financial Market Liaison Group (FMLG) in 2014 and 2016; not deemed adequate.
  - August 2018: SARB published Consultation Paper on Selected Interest Rate Benchmarks in South Africa with specific proposals; discussed widely with market participants.
  - Market Practitioners Group (MPG) established in 2019 with five work streams: risk-free reference rates; unsecured reference rates; data collection; governance; and transitioning.
- Policy intent:
  - SARB’s longer-term intention is to phase JIBAR out and replace it with a more widely based money market interest rate.
  - Recommendation that the renewed Sabor be based on unsecured interbank overnight rates and that STeFI calculation be renewed in line with the IOSCO Principles for Financial Benchmarks.
  - Promote establishment of SA Treasury bill benchmark indices in 1, 3, 6 and 12-month maturities and for the overall T-bill market as soon as regular market making begins.
  - Consider introducing benchmark interest rate curve beyond one year based on interbank interest rate swap quotations (JIRS).

### Detailed recommendations (selected, with timing and implementing body)
- Money Market Development:
  - Harmonize regulatory, accounting and tax treatments of different types of collateral and repos — SARB, MT.
  - Improve collateral management by establishing interoperability between different pools of collateral — SARB, Strate, ST.
  - Promote widespread use of classic repos under GMRA vs buy-sell backs — SARB, ST.
  - Introduce market making requirement for primary dealers in Treasury bills on the Electronic Trading Platform (selected maturities: at minimum 1, 3, 6 and 12-month) — SARB, NT, JSE, ST.
- Benchmark Interest Rates and Indices:
  - Renew Sabor calculation in line with IOSCO Principles; recommend renewed Sabor be based on unsecured interbank overnight rates — SARB, ST.
  - Promote establishment of T-bill benchmark indices in 1, 3, 6 and 12-month maturities and for overall T-bill market; compile and publish daily indices by each designated maturity as soon as market making and reliable market prices are available — SARB, NT, ST.
  - Consider introducing benchmark interest rate curve beyond one year using interbank interest rate swap quotations (JIRS) to price longer-term fixed rate loans and increase transparency — SARB, MT.
- Timing codes: I = Immediately; ST = short term = less than 1 year; MT = medium term = 1-5 years.

### SARB’s operational framework and liquidity management (key points)
- Objectives and operational target:
  - SARB primary objective (SARB Act): protect the value of the South African currency in the interest of balanced and sustainable economic growth; additional objective to protect and maintain financial stability.
  - Inflation targeting since 2000; inflation target currently 3–6 percent for headline CPI with MPC emphasizing closing to the 4.5 percent midpoint.
  - Operational target: a predetermined liquidity shortage, achieved via cash reserve requirement system, open market operations (SARB debenture and reverse repo auctions), FX swaps and moving public sector funds between the market and SARB.
- Main instruments and parameters:
  - Main refinancing operation: weekly 7-day repo auction with rate fixed at the SARB repo rate; typical targeted systemic liquidity shortage around 56 billion rand pre-COVID.
  - SARB debentures issued weekly in 7, 14, 28, and 56-day maturities; debentures qualify as statutory liquid assets.
  - Overnight standing facility deposit and lending rates set 100 bp below and above the repo rate, respectively.
  - Minimum reserve requirement ratio for banks: 2.5 percent; reserve maintenance period: one month (15th business day to 14th business day).
- Structural operations:
  - Structural liquidity management mainly via 3–6 months maturity FX swaps carried out bilaterally; cost of FX swaps covered by National Treasury’s Gold and Foreign Exchange Contingency Reserve Account.
  - National Treasury holds almost all operational rand liquidity at the four big banks, with balances ranging from 50–250 billion rand.
  - NT’s Sterilization Deposit Account at SARB: legacy item from 2010; NT plans to withdraw and use the whole amount in the next few years, which will add further 41 billion rand to systemic liquidity.

### Assessment of efficiency, recent stresses, and issues
- Pre-COVID performance:
  - Targeting a liquidity shortage served SARB well; Sabor kept very close to repo rate; 3-month JIBAR moved in line with key policy rate.
- COVID-19 related stresses:
  - Structural liquidity shifted into a surplus rapidly due to:
    - Conversion of IMF and other foreign currency loans (around 65 billion rand).
    - SARB’s government securities purchase program (more than 30 billion).
    - Use of part of NT special sterilization deposit account (26 billion).
    - Loan Guarantee Scheme.
  - SARB lowered its liquidity shortage target to 30–35 billion rand in reaction to these shifts.
- Instrument choice and consequences:
  - Extensive use of FX swaps for sterilization led to implied rand rates spiking on maturities below one year and deviating from the SARB repo rate, creating increased short-term interest rate volatility.
  - FX swap sterilization overlapped with government T-bill issuance, potentially contributing to T-bill rates rising above NCD rates.
  - Banks faced challenges meeting rand LCR requirements because foreign exchange received in FX swaps does not count as rand HQLA under the LCR.
  - SARB began decreasing outstanding FX swaps by not renewing maturing transactions and relied more on issuance of debentures for sterilization.
- Market functioning concerns:
  - Weekly offering of instruments in 4 maturities by SARB could crowd out interbank dealing and lead banks to deal with SARB instead of each other, suboptimal for market functioning.
  - SARB’s internal liquidity forecasting is very short term and complicated by NT holding operational rand liquidity at commercial banks, effectively exporting forecasting challenges to the four big banks.
  - SARB’s responsibility for investments of the Corporation for Public Deposits (CPD) creates potential conflict of interest and reduced transparency; CPD call account paid 3-month T-bill minus 10 basispoints.

*Source: IMF staff summary of South Africa financial market and liquidity framework content.*

### Box 2. Corporation for Public Deposits

### Box 2. Corporation for Public Deposits

### Establishment and legal framework
- The Corporation for Public Deposits (CPD) was established as a subsidiary of the SARB in 1984 after the dissolution of the National Finance Corporation.
- The CPD is governed by the Corporation for Public Deposits Act 46 of 1984.
- With the permission of the Minister of Finance, the CPD may accept call deposits from other depositors.

### Activities and operational model
- The CPD accepts call deposits from the public sector and invests the funds in short-term money-market instruments and special Treasury bills.
- All funds invested with the CPD, and the interest earned on these funds, are payable on demand.
- SARB is responsible for the investments and administration of the daily business operations of the CPD.
- The actual market investments of CPD are carried out by the FMD.
- CPD’s liabilities consist primarily of deposit accounts; the margin accounts of ETP are also placed at the CPD.
- CPD’s assets consist of cash, money market investments, short-term deposits and loans and advances.
- Loans are advanced as part of the national government’s Inter-Governmental Cash Coordination (IGCC) arrangement, under which some state-owned entities and treasuries of provincial governments deposit excess funds with the CPD to form a pool of funds from the public sector.
- National Treasury guarantees that the deposits will be made available to depositors on demand.
- The national and the provincial treasuries are allowed to borrow money from the IGCC pool of funds.

### Governance
- The activities of the CPD are managed and controlled by a four-member Board, two from SARB and two from NT, appointed by the Minister of Finance.

### Size and operating cost (point-in-time figures)
- In Q1 2020, the size of the balance sheet was around 70 billion rand.
- The operating cost to run the CPD is about 4 million rand.

### Credit losses, guarantee, and solvency status
- According to CPD’s 2020 Financial Statements, “the significant increase in credit risk to the value of R2.3 billion, the impact of COVID-19 and counterparty defaults has rendered the CPD technically insolvent as its liabilities exceed its assets."
- As a remedy, “the SARB has issued a guarantee in favor of the CPD to the value of R3.45 billion for all amounts required by it for the due and punctual performance of its obligations under the CPD Act.”

### Credit risk, central bank exposure, and regulatory consistency
- Managing the CPD portfolio exposes SARB to unnecessary credit risk which might hinder it focusing on its core central bank functions.
- According to the SARB Act, except some specific cases, the central bank cannot lend without adequate collateral. However, CPD’s investment guidelines allow unsecured lending.
- As CPD is fully owned by SARB, the guideline permitting unsecured lending is not in line with the spirit of the central bank act.
- Losses emanating from unsecured lending (bank deposits, promissory notes) are a potential burden on SARB’s balance sheet, threatening its capacity to carry out its main central bank functions.

### Transparency and operational concerns
- While overall SARB is a very transparent central bank, enhancements to transparency can be made to some of its liquidity management operations, including FX swaps.
- Highly detailed daily information is available about some core operations (repos, debentures auction) and values of important variables such bank balances compared to reserve requirement, currency in circulation or outstanding amounts of repos and debentures.
- There is little and late information about SARB’s FX swaps or the use of government (CPD) funds for liquidity management.
- In some cases SARB prefers OTC transactions, even when the tender format could also be considered (for example, in case of FX swaps or government bond purchases).

*Source: IMF staff summary of Box 2. Corporation for Public Deposits, from the cited IMF chapter.*

### 52.      The inter-agency  arrangements  are satisfactory with regard to roles and

### 1zafea2022006 - 52.      The inter-agency  arrangements  are satisfactory with regard to roles and

### Inter-agency arrangements and roles for ELA implementation
- Inter-agency information exchange:
  - The SARB, PA and NT exchange information on relevant financial sector and market developments regularly.
  - Representatives of PA are members of the Financial Stability Committee and representatives of SARB are members of the Prudential Committee.
  - The Financial Stability Oversight Committee (FSOC) includes representatives from the SARB, National Treasury and all financial regulators.
  - The Financial Sector Contingency Forum (FSCF) assists the FSOC with identifying risks that could lead to a systemic event.
- Memoranda of Understanding and guidelines:
  - SARB and the JSE have an MoU setting out responsibilities and processes when a JSE member defaults.
  - No formal MoU currently exists between SARB, PA and NT concerning cooperation in case of an ELA request, but recently accepted internal guidelines clearly delineate roles and responsibilities.

### Emergency Liquidity Assistance (ELA) framework: scope and eligibility
- Primary design and intended extensions:
  - The ELA framework is primarily designed for systemically important domestic banks as eligible entities.
  - The framework is not explicit about other eligible entities for ELA.
  - SARB intends to extend the ELA guidelines to non-bank financial institutions (NBFIs) such as systematically important financial market infrastructures (FMIs). 
  - It is understood SARB would provide ELA to branches of foreign banks only in very specific cases and on exceptional basis.
- Foreign-currency ELA:
  - ELA in foreign currency is allowed by the SARB Act; the guidelines are silent about it.

### Collateral, CLF linkage, and operational preparedness
- Committed Liquidity Facility (CLF) and collateral mobilization:
  - CLF aided the industry’s ability to mobilize non-standard collateral and has operational similarities to ELA but a different purpose (to meet LCR requirements).
  - Under CLF, additional collateral pools were developed and tested in practice: mainly marketable debt securities with minimum investment grade, collateralized and self-collateralized residential home loans, commercial loans and vehicle finance.
  - The new ELA Framework adds the use of performing loans less portfolio credit impairments, such as home loans, credit cards, wholesale and retail term loans.
  - Guidelines contain provisions about applicable haircuts.
- Prepositioning capability:
  - To ensure effectiveness, prepositioning capabilities should be effectively retained so banks can mobilize non-standard collateral on a timely basis.

### Indicative terms, discretion, and disclosure
- Interest rate and tenor discretion:
  - Indicative terms leave wide room for SARB discretion on interest rate and tenor.
  - Guidelines only specify that ELA should not be in subsidized form—implying any rate at or above the repo rate is acceptable.
  - Guidelines do not determine initial tenor or rules on extensions.
  - Current guidelines do not ensure that (i) banks request ELA only when all other funding sources have been fully exhausted; and (ii) banks stay in the program only temporarily.
- Disclosure policy:
  - Guidelines follow international best practice on disclosure of actual ELA operations, balancing confidentiality and reasonable time lag.
  - Guidelines specify preconditions for disclosure and types of situations justifying delayed disclosures.
  - SARB is preparing a public document outlining main guidelines without confidential and technical details.

### Testing and simulation of ELA procedures
- No recent simulation exercises:
  - SARB and PA have not undertaken simulation exercises or other testing procedures to evaluate adequacy of ELA policies and procedures.
  - SARB has some past experience (African Bank) but it was quite some time ago.
- Importance of testing:
  - Prior testing can greatly enhance efficiency in real-life stress situations where quick decision making is essential.

### Managing system-wide liquidity stress — Domestic currency measures (COVID-19 response)
- SARB’s rapid measures at COVID-19 outbreak included:
  - Introduction of Overnight Supplementary Repurchase Operations offered at the SARB’s repo rate; amount determined in line with prevailing money market liquidity conditions.
  - Expanding the weekly Main Refinancing Operation (MRO). SARB explicitly expressed readiness to increase the regular size of the MRO (56 billion rand) in case it is needed.
  - Decrease of the O/N Standing Facility (SF) rates by 100 bp; SF lending facility became equal with the repo rate.
  - Introduction of a weekly longer-term refinancing operation (LTRO) with 3-month maturity at repo plus 30bp; SARB expressed readiness to extend maturity up to 12 months if necessary.
  - Announcement of a secondary market government securities purchasing program, across the yield curve, with no pre-set target amount.
- Market effects and transparency:
  - Measures were overall successful with strong announcement effect; longer-term government bond yields fell about 150–200 bp after the media statement.
  - SARB conducted bond purchases via bilateral OTC transactions rather than tenders, providing little and late information about actual purchases; this gave ground to unfounded market speculations.
  - More than one year after the start of purchases, SARB had not announced the end of its interventions, contributing to market uncertainty.

### Market monitoring and data
- SARB market monitoring:
  - Financial Market Department (FMD) continuously monitors all relevant markets and provides focused information to management.
  - SARB has strong relations with market participants (daily calls, monthly meetings, Financial Market Liaison Group).
- Data gaps and improvements:
  - Timeliness and depth of analyses could be increased by collecting more granular transactional information from the market.
  - Currently SARB collects limited transactional data on the FX and OTC derivatives markets.
  - Greater availability of transaction-level information could help identify market trends, anomalies and build-up of speculative positions earlier.

### Managing system-wide liquidity stress — Foreign currency and reserves
- FX market functioning and responsibilities:
  - Foreign currency loan portfolio of domestic banks is small relative to balance sheets, implying limited systemic liquidity risk.
  - FX swap markets continued to function during the GFC and COVID-19 without central bank intervention.
  - All big banks are based in South Africa (no foreign parents to provide emergency lines), increasing SARB’s responsibility in case of stress in international and local FX swap markets.
- FX liquidity capacity and facilities:
  - SARB does not have and never had an FX swap line with the Fed, but has access to the Fed’s FIMA Repo Facility.
  - In 2015 SARB set up a bilateral swap facility with the PBoC for the exchange of US$4.75 billion in local currency terms; the stated purpose is to support trade and investment between South Africa and China and to mitigate short-term balance of payment pressures. The facility has not been actively used yet.
- Reserves and intervention policy:
  - Foreign reserves are USD 52 billion, which is above 6-month import cover and the Guidotti-rule but below IMF’s ARA metric.
  - SARB’s policy of intervening in the FX market only as a last resort has served it well; there is no formal published FX intervention strategy.
  - As South Africa moves toward more capital account liberalization, intervention policy and adequate size of reserves need to be reviewed at least annually.

### Detailed recommendations (selected, with timing)
- Legal and framework matters:
  - Formalize the legal framework for ELA, including specific objectives and preconditions, through an amendment of the SARB Act. Suggested inclusions: exhaustion of private sector liquidity, minimum capital adequacy or near-term expected compliance, sufficient collateral, capacity to repay; empower SARB to lend without collateral if government indemnifies SARB; confine lending ability (amend section 10) to entities licensed and supervised by PA, entities designated by SARB under proposed designation power in the Resolution Bill, and entities otherwise deemed systemically important. (SARB, MT)
- Operational and governance arrangements:
  - Develop further the ELA Framework covering conditions for idiosyncratic events, safeguards for foreign-owned entities and branches, and when ELA requests include foreign currency. (SARB, PA, ST)
  - Assign Financial Stability Department (FSD) to coordinate ELA decision-making; ELA requests to be addressed normally to governor or deputy governor via FSD, not via prudential supervisors. (SARB, I)
  - Update existing MOUs between SARB and PA, and SARB and National Treasury to include ELA procedures; make SARB indemnification against ELA losses a more integral part of Framework. (SARB, PA, NT, MT)
  - PA should set out internal guidance for solvency, liquidity and viability assessments for ELA purposes (detailed information lists, unit responsibilities, deadlines, methodologies, decision trees). (PA, ST)
- Terms, collateral and risk control:
  - Firm up indicative terms of ELA: applicable interest rate, initial maturity and extension conditions. Guidelines could suggest an initial maturity (e.g., four weeks) and preconditions for extensions; consider remuneration schedules with initially higher rates and gradual reductions contingent on repayment plans. (SARB, ST)
  - Continue widening available pools of collateral and ensure banks preposition portfolios for collateral access (e.g., via repo arrangements) to allow SARB time for documentation and valuation. (SARB, MT)
  - Implement additional risk control measures: overcollateralization, concentration limits, exclusion of loans to related parties, enhanced reporting, audits and asset quality reviews, prohibition of dividends and bonuses while ELA is received, restrictions on new investments. (SARB, PA, ST)
- Testing, disclosure and market monitoring:
  - SARB and PA to jointly undertake regular testing of ELA arrangements, including:
    - Simulating assessment procedures (solvency and viability assessment, determination of ELA parameters, decision making).
    - Simulating mobilization of non-standard ELA collateral (mobilization, legal transfer, eligibility assessment, pricing and haircut determination).
    - Involvement of domestic systemically important banks to simulate procedural aspects and broaden ex ante transparency. (SARB, PA, NT, ST)
  - SARB may publish general rules, parameters and conditions for each form of liquidity support to increase public awareness; published guidelines should as a minimum cover purpose, eligible entities, preconditions and principle of lending against collateral or government guarantee. Not recommended to disclose haircuts likely to be applied. (SARB, ST)
  - Use standard LOLR—ELA definitions for clearer communication. (SARB, I)
  - Improve market monitoring by collecting more granular daily data about FX and money market transactions by product, maturities and counterparties; automate data provision and management; distribute aggregated data regularly to market participants. (SARB, MT)

- Timing legend:
  - I: Immediately; ST: short term = less than 1 year; MT: medium term = 1–5 years.

*SOUTH AFRICA — INTERNATIONAL   MONETARY  FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1zafea2022006.pdf_