Money market portfolios are now permitted to invest in money market instruments linked to the Zaronia benchmark and similar rates, in terms of an exemption from Board Notice 90 of 2014 published by the Financial Sector Conduct Authority last week.
The exemption, effective as of 24 April, relieves money market portfolios of collective investment schemes from adhering to Chapter 2, Condition 8(4)(b) of BN 90. This condition typically mandates that the interest rate of instruments included in such portfolios must be known in advance, subject to a 24-hour historic limitation.
The FSCA explained the reasons for the exemption in Communication 10 of 2025 (CIS).
The Authority said it has been updating its regulatory frameworks as part of the Twin Peaks reform process. This includes aligning existing rules with new legislation, such as the forthcoming Conduct of Financial Institutions Bill, and modernising references to outdated financial indices.
Board Notice 90 is a key regulation that outlines:
- The types of securities and assets that can be included in a CIS portfolio.
- The limits and conditions under which these can be included.
Although a comprehensive review of BN 90 is under way, it is not yet complete, and delays are anticipated. In the meantime, market developments have created challenges for money market portfolios.
The exemption addresses a significant shift in the South African financial market: the transition from the Johannesburg Interbank Average Rate (Jibar) to a new benchmark, the South African Rand Overnight Index Average (Zaronia).
Stakeholders have decided to proceed with a May 2025 go-live date for issuing and trading interest rate-linked instruments (for example, listed instruments and bank paper) tied to Zaronia, following the discontinuation of Jibar-based issuance in the first quarter of 2025.
Condition 8(4)(b) of BN 90 requires that the interest rate of an instrument be fixed or known in advance. However, Zaronia-linked instruments, particularly for overnight placements, determine the applicable rate the following day, conflicting with this requirement.
Without this exemption, money market portfolios would be unable to invest in Zaronia-linked instruments, limiting them to fixed-rate or prime-linked options. This restriction would hinder their ability to participate in new bank funding mechanisms during the transition.
To address this, the FSCA has issued CIS Notice 2 of 2025, which allows money market portfolios to include these new instruments despite the uncertainty of rates at the time of investment.
To ensure transparency and protect investors, the exemption comes with strict conditions.
For money market instruments with an unknown initial interest rate:
- A cumulative compound interest rate must be calculable from the instrument’s issue date to its valuation date. This calculation must use an overnight benchmark interest rate published daily by the South African Reserve Bank on the following business day.
- The cumulative compound interest rate (plus any applicable credit spread) must be used to compute the daily interest accrual, ensuring that the total interest accrued since the issue date is known at any given time.
These conditions allow managers to handle instruments with variable or floating rates while maintaining accurate valuation and reporting.
The FSCA said the exemption is in the public interest, because it supports the smooth transition of the financial market to the new Zaronia benchmark. In addition, the exemption does not undermine the objectives of the Collective Investment Schemes Control Act, which governs CIS operations, but facilitates the transition of money market instrument rate referencing from Jibar to Zaronia and other similar rates.
The measure is temporary, bridging the gap until the full review of BN 90 is completed and updated regulations are in place.
Queries about CIS Notice 2 of 2025 should be sent to Marius de Jongh of the FSCA’s Regulatory Frameworks Department: Marius.deJongh@fsca.co.za.
