Market participants often use widely known interest rates to price, value and measure the performance of financial securities across various markets, including equity, credit, commodity, fixed income, and foreign exchange (FX) markets. These rates are commonly characterised as reference rates as they are often referenced in financial contracts. Some of these rates are determined solely by credible institutions, such as the policy rates of central banks, while others combine inputs from numerous contributors to form indices that are commonly referred to as benchmark rates. Essentially, reference rates tend to reflect wider market conditions, assist in price discovery, and reduce information asymmetry.
Certain benchmark rates are deemed critical as they underpin the pricing of a large volume of financial contracts worth trillions of rands and are used to measure the performance of large investment funds. Consequently, they are deeply embedded in the global financial system and play an important role in the functioning of modern financial markets. Examples of such critical benchmarks include the US dollar London Interbank Offered Rate (Libor) and the Johannesburg Interbank Average Rate (Jibar), which are widely referenced in financial instruments within the South African financial market.