Sebi looks to ease stress-test rules for commodity derivatives clearing houses

MUMBAI: The Securities and Exchange Board of India (Sebi) has proposed easing risk-management regulations for clearing corporations in the commodity derivatives market after feedback that some existing safeguards may be more stringent than necessary and could be overstating risk.

In a consultation paper issued on Thursday, the regulator suggested revisiting rules governing the Settlement Guarantee Fund (SGF), which is designed to absorb losses arising from member defaults.

Under the current framework, clearing corporations must run standardized stress tests using 15 years of historical price data. Extreme price movements are capped using a Z-score of 10, a threshold meant to capture exceptionally rare events. Sebi said it has received representations that such a high threshold may overstate potential risk and impose unnecessary capital costs on the system.

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 how extreme or unusual a market movement is.

The regulator has proposed lowering the Z-score to 5, which it said would still cover “extreme but plausible” scenarios that markets have experienced or could realistically face.

The paper also addresses concerns over the extent of SGF coverage. Currently, clearing corporations must size the fund to cover losses from the simultaneous default of at least two clearing members, as well as 50% of losses that could arise from the default of all clearing members.

Sebi said this requirement may be disproportionate for the commodity derivatives market. It noted that in segments such as equity derivatives, clearing corporations follow a cover-based approach focused on the default of the largest clearing members, rather than assuming widespread market failure.

The regulator has proposed revising the coverage requirement so that clearing corporations calculate exposure based on the default of at least three clearing members and their associates, and remove the 50% all-member default condition.

Sebi said the changes would align the commodity derivatives framework more closely with global practices for central counterparties, while continuing to ensure adequate protection against systemic risk.

“The changes are needed right now as the commodity markets are now developing more holistically, and this reflects a shift from building maximum resilience towards optimizing capital efficiency as the market develops,” said Raj Shah, co-founder and executive director at EPP Securities.

“Lower risk charges typically encourage participation, improve liquidity, and reduce trading costs, which can support market depth over time. However, the trade-off is a marginal reduction in protection against extremely rare tail-risk events,” Shah added.

Public comments on the proposals are invited until 26 February.