SEBI Cuts Commodity Derivatives Stress-Test Z-Score Threshold from 10 to 5
SEBI has lowered the Z-score threshold used to cap extreme historical price movements in the standardised stress testing of the commodity derivatives segment from 10 to 5. The change was made through SEBI circular HO/47/16/14(1)2026-MRD-POD1/I/18580/2026 dated 12 August 2026, titled "Review of Inclusion of Historical Scenarios in Stress Testing for Commodity Derivatives Segment". It applies with immediate effect.
Who it applies to
The circular is addressed to the Managing Directors and Chief Executive Officers of all recognised clearing corporations that operate a commodity derivatives segment. Stress test results are used in determining the corpus of the Core Settlement Guarantee Fund, the default fund that backs settlement at a clearing corporation, so the change matters to clearing corporations' risk teams and, indirectly, to clearing members and exchanges that contribute to or rely on that fund.
What has changed
The stress testing provisions sit in paragraph 22 and Annexure O of the SEBI Master Circular for Commodity Derivatives Segment (SEBI/HO/MRD/MRD-PoD-1/P/CIR/2023/136 dated 4 August 2023). Under the historical scenarios, a clearing corporation computes the mean and standard deviation of returns over the applicable Margin Period of Risk (MPOR) across a 15-year period, and uses the peak rise and fall in prices (Scenarios 1A and 1B) as stress scenarios.
| Point | Before 12 August 2026 | From 12 August 2026 |
|---|---|---|
| Cap on extreme historical price movements | Moves beyond a Z-score of 10 replaced by the move corresponding to a Z-score of 10 | Moves beyond a Z-score of 5 replaced by the move corresponding to a Z-score of 5 |
| Look-back period | 15 years | 15 years (unchanged) |
| Return horizon | Applicable MPOR | Applicable MPOR (unchanged) |
A Z-score measures how many standard deviations an observation lies away from the mean. With a cap of 10, an extremely rare past price movement could feed into the stress scenario almost in full. Lowering the cap to 5 means any historical move more extreme than five standard deviations is replaced by the move at five standard deviations, which reduces the severity of outlier-driven scenarios. The historical approach itself remains; only the treatment of the most extreme observations has been recalibrated.
Why SEBI made the change
The circular records that SEBI acted on representations from stakeholders, the recommendations of its Risk Management Review Committee and public comments received on the proposal. The historical scenario framework in the commodity segment had earlier been reviewed through SEBI circular SEBI/HO/CDMRD/DRMP/CIR/P/2020/244 dated 21 December 2020, and the latest circular revises the Z-score element of that framework as now carried in the master circular.
The circular is issued under section 11(1) of the SEBI Act, 1992 read with regulation 51 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.
Impact and what clearing corporations should do
The effect will differ from commodity to commodity, depending on how fat-tailed its historical return distribution is. For commodities with a history of very sharp one-off moves, the lower cap may reduce computed stress losses and, through that, the Core SGF requirement attributable to those contracts. Clearing corporations should:
- update the stress testing parameters and risk engine logic to apply the Z-score cap of 5 from 12 August 2026;
- revise internal methodology documents and obtain approvals under their model governance process;
- check that downstream calculations that use stress loss outputs, including the Core SGF corpus, run on the revised figures;
- retain testing and validation evidence of the change for inspection and audit.
Auditors and internal reviewers of market infrastructure institutions should look at model change controls, the implementation date and the reconciliation of stress loss results before and after the change. The full text is available in the circular PDF on the SEBI website.
Updated on 27 September 2026: added the official SEBI circular number and link, the master circular reference, the legal basis, the immediate effective date and a before-and-after table; removed an unverified reference to a February 2026 consultation paper.
