Summary of this article
Sebi has halved the Z-score limit for commodity derivatives to five
This changes how clearing corporations measure extreme price swings
The new stress-testing rule takes effect immediately
The Securities and Exchange Board of India (Sebi) has revised the stress-testing framework for the commodity derivatives segment, lowering the Z-score threshold used to account for extreme price movements from 10 to five.
The amendment, announced through a circular dated August 12, will take immediate effect. It modifies the provisions governing standardised stress testing under the Core Settlement Guarantee Fund (SGF) framework for commodity derivatives.
What Has Changed
As per the current rules, clearing corporations assess peak historical returns by looking at the maximum percentage rise and fall in the price of each commodity over the applicable Margin Period of Risk (MPOR) during the previous 15 years.
Earlier, price movements corresponding to a Z-score of 10 replaced extreme price movements beyond that level. Sebi has now reduced this threshold to five.
The mean and standard deviation, or sigma, of returns over the applicable MPOR across the 15-year period will continue to be used to calculate the Z-score.
What is Z-Score
The Z-score is used to identify unusually large price movements in historical data for stress-testing purposes. By lowering the threshold from 10 to five, the revised framework changes the level at which exceptionally large historical price moves are replaced for the purpose of calculating peak historical returns.
Why Does It Matter
For investors, the change is relevant because stress testing forms part of the risk-management framework used by clearing corporations to assess their ability to withstand sharp market movements. The framework is also linked to the Core SGF, which provides resources to meet obligations in the event of a default.
The circular does not alter the 15-year historical window or the use of the applicable MPOR. The key change is the Z-score threshold used in the calculation.
Why Has Sebi Changed The Threshold
Sebi said it received representations from stakeholders seeking a review of the existing Z-score provision. The decision followed recommendations from the regulator's Risk Management Review Committee (RMRC) and consideration of public comments.
Sebi said the change has been made with the objective of facilitating ease of doing business.
