Consultation Paper Dated 05.02.2026
The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing to reduce the Z-score threshold from 10 to 5 for the inclusion of historical scenarios in standardised stress testing for the commodity derivatives segment.
1. Existing Stress Testing Framework
Under the current framework:
- Historical price scenarios with extreme price movements are included in stress testing
- Such movements are identified using a Z-score threshold of 10, which captures highly extreme and infrequent market events
SEBI has observed that this threshold may result in overly conservative stress outcomes, particularly in the commodity derivatives market.
2. Proposed Change in Z-Score Threshold
Under the proposal:
- The Z-score threshold will be reduced from 10 to 5
- Price movements corresponding to a Z-score of 5 will be considered for stress testing
- Extreme price movements beyond the Z-score of 5 will be replaced by the capped movements at the Z-score 5 level in peak historical returns
This change is intended to strike a balance between prudence and realism in stress testing.
3. Rationale for the Proposal
The proposal is based on:
- Recommendations of the Risk Management Review Committee
- Representations received from market stakeholders highlighting the need for a more calibrated stress-testing approach
SEBI has acknowledged that while stress tests should remain robust, they should also reflect practical market behaviour and avoid undue strain on market participants.
4. Impact on Commodity Derivatives Segment
If implemented, the proposal is expected to:
- Moderate extreme stress test results
- Improve risk calibration without compromising systemic safety
- Enhance operational efficiency for exchanges and clearing corporations
5. Invitation for Public Comments
SEBI has invited public comments and suggestions on the consultation paper, considering its implications for exchanges, clearing corporations, and commodity derivatives market participants.
Stakeholders are encouraged to provide feedback to assist SEBI in finalising the proposed framework.
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