SEBI has proposed to ease the stress testing and coverage of settlement guarantee fund for commodity derivatives market to promote ease of doing business and align risk management with global standards.
In a consultation paper, it has proposed reducing the Z-score used for historical stress testing in commodity derivatives to five from the existing 10 and revising the coverage requirement of the core settlement guarantee fund to account for the simultaneous default of the top three clearing members, instead of factoring in 50 per cent of the credit exposure arising from the default of all clearing members.
Under the current framework, clearing corporations are required to conduct standardized stress testing using peak historical price movements over a 15-year period, with extreme returns capped at a Z-score of 10. Market participants have argued that the threshold is overly conservative and that a Z-score of five would still adequately cover “extreme but plausible” market scenarios.
A Z-score is a statistical measure of how far a price move deviates from its average, expressed in standard deviations and is used to assess extreme or unusual market movements.
Cover-based approach
SEBI noted that in equity derivatives segment, clearing corporations follow a cover-based approach focused on the default of the largest clearing members, rather than assuming widespread market.
The proposed changes will align the commodity derivatives framework more closely with global practices for central counterparties, while continuing to ensure adequate protection against systemic risk.
Public comments on the proposals are invited until February 26.
Published on February 5, 2026