SEBI Cuts Z-Score Threshold For Commodity Derivatives Stress Tests From 10 To 5
The Securities and Exchange Board of India (SEBI) has reduced the Z-score threshold used in stress testing for commodity derivatives from 10 to 5. The change, effective immediately, is aimed at easing compliance requirements and improving capital efficiency for market participants. Under the earlier framework, price movements beyond a Z-score of 10 in the peak historical returns of commodities…
The Securities and Exchange Board of India (SEBI) has lowered the Z-score threshold for stress testing commodity derivatives from 10 to 5. This reduction, effective immediately, aims to simplify compliance for market participants while maintaining robust protection against extreme market conditions. The Z-score evaluates how far price movements deviate from historical averages, using 15 years of data and the Margin Period of Risk (MPOR).
This change, which impacts the Core Settlement Guarantee Fund (Core SGF) framework, could reduce capital requirements for clearing corporations, particularly for volatile commodities. By capping historical price shocks at five standard deviations, the revised threshold still covers over 99.9999% of typical market scenarios, ensuring substantial risk protection.
The actual impact will differ depending on the commodity, with historically volatile ones experiencing a more significant reduction in stress-test inputs.
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