SEBI Proposes Easing Stress-Test Norms For Commodity Derivatives Clearing Houses

The regulator has suggested lowering stress-test thresholds and revising default coverage assumptions to better align with global practices while maintaining systemic safeguards. The Securities and Exchange Board of India has proposed easing risk-management regulations for clearing corporations operating in the commodity derivatives market.

In a consultation paper issued on Thursday, the regulator said some existing safeguards may be more stringent than required and could be overstating risk. The proposals focus on changes to the Settlement Guarantee Fund, which is used to absorb losses arising from member defaults.

Stress-Test Thresholds Under Review

Under the current framework, clearing corporations are required to conduct standardised stress tests using 15 years of historical price data. Extreme price movements are capped using a Z-score of 10, a level intended to capture exceptionally rare market events.

SEBI said it has received representations that this threshold may impose unnecessary capital costs and exaggerate potential risk exposure. The regulator has proposed lowering the Z-score to 5, stating that it would still cover extreme but plausible market scenarios.

Changes To Settlement Guarantee Coverage

The consultation paper also addresses concerns over the size and coverage of the Settlement Guarantee Fund.
At present, clearing corporations must size the fund to cover losses from the simultaneous default of at least two clearing members, along with 50% of losses that could arise from the default of all clearing members.

SEBI said this assumption may be disproportionate for commodity derivatives. It noted that equity derivatives clearing follows a cover-based approach focused on the default of the largest members rather than system-wide failure.

Under the proposed framework, clearing corporations would calculate exposure based on the default of at least three clearing members and their associates, while removing the 50% all-member default condition.

Alignment With Global Practices

SEBI said the proposed changes aim to align India’s commodity derivatives clearing framework with global standards for central counterparties, while continuing to ensure adequate protection against systemic risk.
Public comments on the proposals have been invited until 26 February.