1. Executive Summary
The circular issued by the Securities and Exchange Board of India (SEBI) on 12 August 2026 introduces an important change to the stress-testing methodology applicable to the Commodity Derivatives Segment of recognised clearing corporations.
The principal amendment concerns the Z-score threshold used in historical scenario stress testing for determining the Core Settlement Guarantee Fund (Core SGF). SEBI has reduced the threshold from 10 to 5. Consequently, price movements corresponding to a Z-score beyond 5, rather than beyond 10, will be replaced by the Z-score threshold in the calculation of peak historical returns.
The amendment takes immediate effect and is expressly stated to have been introduced following stakeholder representations, recommendations of the Risk Management Review Committee (RMRC) and public comments, with the stated objective of facilitating Ease of Doing Business.
2. Regulatory Background
The circular modifies the provisions contained in Paragraph 22 of Annexure O of SEBI's Master Circular for the Commodity Derivatives Segment dated 4 August 2023, which prescribes the methodology for Standardized Stress Testing for Commodity Derivatives and, in particular, the requirements relating to the Core SGF.
Under the existing framework, historical scenarios include the Peak Historical Return, under which the price movement of each underlying over the applicable Margin Period of Risk (MPOR) is considered over the preceding 15 years. Both the maximum percentage rise and maximum percentage fall are considered.
3. Key Amendment
The most significant change is:
| Particulars | Earlier provision | Revised provision |
|---|---|---|
| Z-score threshold | 10 | 5 |
| Historical period | 15 years | 15 years |
| MPOR-based price movement | Applicable | Continues |
| Mean and sigma for Z-score | Applicable MPOR returns over 15 years | No change |
| Effective date | — | Immediate |
Under the earlier methodology, price movements corresponding to a Z-score of 10 replaced extreme price movements exceeding that threshold. The amended framework reduces this to a Z-score of 5.
Importantly, the 15-year historical observation period has not been changed. Nor has SEBI altered the underlying methodology for calculating the Z-score, which continues to use the mean and sigma of returns over the applicable MPOR across the 15-year period.
4. Significance of Reducing the Z-score from 10 to 5
This is a material risk-management parameter change.
A Z-score measures the magnitude of an observed price movement relative to the historical distribution of returns. Under the earlier framework, only extremely remote price movements beyond the 10-standard-deviation threshold were capped/replaced.
By lowering the threshold to 5 standard deviations, SEBI is effectively imposing a more conservative cap on extreme historical price observations used in this particular stress-testing scenario.
Thus, while the numerical change from 10 to 5 may appear straightforward, its practical impact will depend upon the historical return distributions of individual commodities and their respective MPORs.
The amendment therefore does not simply reduce the severity of stress testing. Rather, it changes the treatment of extreme historical observations and standardises the manner in which exceptionally large historical movements influence the stress-testing calculation.
5. Impact on Clearing Corporations
The circular is specifically addressed to all recognised clearing corporations having a Commodity Derivatives Segment.
Such clearing corporations will need to review and, where necessary, modify their stress-testing systems and calculations to ensure that:
- The Z-score threshold of 5 is incorporated in place of 10.
- Historical price movements continue to be evaluated over the prescribed 15-year period.
- The applicable MPOR continues to be correctly applied.
- Mean and sigma continue to be calculated in accordance with the prescribed methodology.
- The revised stress-test results are appropriately reflected in the determination and monitoring of the Core SGF.
- Relevant risk-management systems, models, controls and documentation are updated accordingly.
Given that the circular has immediate effect, implementation should not be deferred to a future compliance cycle.
6. Impact on the Core Settlement Guarantee Fund
The Core SGF is designed to provide financial resources to meet obligations arising from clearing and settlement in circumstances involving member defaults and adverse market conditions.
Since the circular changes an input into the standardised stress-testing framework, the revised methodology could potentially affect the stress-test outcomes used for assessing the adequacy of the Core SGF.
However, the circular itself does not prescribe a percentage increase or decrease in the Core SGF. Therefore, it would be inappropriate to conclude from the circular alone that the Core SGF requirement will necessarily increase or decrease.
The actual financial impact will depend upon:
- commodity-wise historical return distributions;
- MPOR applicable to each commodity;
- calculated mean and sigma;
- frequency and magnitude of extreme historical price movements; and
- the resulting stress-test requirement.
Accordingly, each clearing corporation should undertake a commodity-wise impact assessment rather than assuming a uniform effect.
7. Regulatory Rationale
SEBI states that the amendment follows:
- representations received from stakeholders;
- recommendations of the Risk Management Review Committee; and
- public comments received during the regulatory process.
SEBI has specifically linked the modification to the objective of facilitating Ease of Doing Business.
This suggests that the regulator considered the existing Z-score threshold to warrant recalibration, presumably after considering stakeholder feedback and the recommendations of its risk-management review mechanism.
The circular itself, however, does not provide quantitative impact analysis or the rationale for selecting 5 rather than 10. Therefore, any further explanation regarding the statistical or economic reasoning behind the specific threshold of 5 would require reference to the underlying RMRC recommendations or SEBI's consultation material, which is not contained in the uploaded circular.
8. Compliance Implications
From a compliance perspective, the amendment should be treated as an immediate regulatory change requiring system and process implementation.
A clearing corporation's compliance/risk-management team should consider undertaking the following:
Immediate actions
- Identify all systems and reports incorporating the Z-score threshold.
- Replace the existing threshold of 10 with 5.
- Validate the revised calculations.
- Conduct parallel testing of the old and revised methodology.
- Assess the impact on commodity-wise stress-test results.
- Evaluate the consequential impact on Core SGF adequacy.
- Update internal risk-management documentation and operating procedures.
- Ensure appropriate governance/approval of the system change.
- Maintain an audit trail demonstrating implementation of the circular.
Governance actions
The change should ideally be placed before the appropriate Risk Management Committee / Board-level committee, wherever required under the clearing corporation's governance framework, particularly if the revised methodology materially changes risk parameters or SGF requirements.
9. Key Risk Considerations
The most important implementation risk is not the textual amendment itself but the possibility of incorrect system implementation.
Particular attention should be paid to:
- inadvertent retention of the Z-score 10 threshold in legacy systems;
- incorrect treatment of negative versus positive price movements;
- incorrect MPOR application;
- errors in calculating mean and standard deviation;
- incorrect treatment of historical observations exceeding the revised threshold;
- discrepancies between automated systems and manually prepared risk reports; and
- failure to update internal documentation and controls.
Because the amendment applies to all commodities, implementation should be validated across the entire commodity universe rather than tested only for selected commodities.
10. Overall Assessment
The circular represents a targeted amendment to the risk-management framework for commodity derivatives, rather than a wholesale revision of the stress-testing methodology.
The principal regulatory change is the reduction of the Z-score threshold from 10 to 5, while the broader architecture of the historical stress-testing framework—including the 15-year historical period and MPOR-based return calculation—remains intact.
From a regulatory-compliance perspective, the amendment is material and requires immediate attention, particularly for recognised clearing corporations operating commodity derivatives segments. The actual quantitative effect on stress-test requirements and Core SGF, however, cannot be determined from the circular alone and should be established through a commodity-wise recalculation using the revised Z-score threshold.
Conclusion
In substance, SEBI has recalibrated the treatment of extreme historical price movements in commodity-derivatives stress testing by replacing the Z-score threshold of 10 with 5. The change is effective immediately and is intended, among other things, to facilitate Ease of Doing Business.
For clearing corporations, the immediate priority should therefore be system implementation, validation, commodity-wise impact assessment and reassessment of Core SGF implications, supported by appropriate risk-management and governance documentation.
