SEBI to ease stress test, settlement guarantee fund for commodity derivatives

The Securities and Exchange Board of India (SEBI) has proposed changes to the stress testing and settlement guarantee fund requirements for commodity derivatives. These changes aim to promote ease of doing business and align risk management practices with global standards. Specifically, SEBI proposes reducing the Z-score used for historical stress testing from 10 to 5, arguing that the current threshold is overly conservative. The coverage requirement for the core settlement guarantee fund will also be revised to focus on the simultaneous default of the top three clearing members, rather than factoring in 50 percent of the credit exposure from all clearing members.

Currently, clearing corporations use a standardized stress testing approach based on peak historical price movements over a 15-year period, capped at a Z-score of 10. Market participants have advocated for a lower Z-score, believing that 5 would still adequately cover “extreme but plausible” market scenarios. A Z-score measures how far a price move deviates from its average, expressed in standard deviations.

SEBI noted that the equity derivatives segment already employs a cover-based approach, focusing on the default of the largest clearing members. The proposed changes will bring the commodity derivatives framework in line with global practices for central counterparties, while maintaining adequate systemic risk protection. Public comments on these proposals are invited until February 26th.

(Source：The Hindu - Business Line)