Review of inclusion of Historical Scenarios in Standardized Stress Testing in Commodity Derivatives Segment

Last updated: 22 December 2020

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The Securities and Exchange Board of India (SEBI) has reviewed the requirements for stress testing in the commodity derivatives segment. Following representations and discussions, SEBI has updated the norms regarding historical scenarios. Specifically, price movements beyond a Z-score of 10 will now be replaced by movements corresponding to that threshold in peak historical returns. This change aims to address concerns arising from extreme price volatility and is effective immediately.

Securities and Exchange Board of India CIRCULAR SEBI/HO/CDMRD/DRMP/CIR/P/2020/244 December 21, 2020 To, The Managing Directors / Chief Executive Officers, All Clearing Corporations having Commodity Derivatives Segment Sir / Madam, Sub: Review of inclusion of Historical Scenarios in Stress Testing in Commodity Derivatives Segment 1. SEBI videCircular SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated July 11, 2018andSEBI/HO/CDMRD/DRMP/CIR/P/2020/128 dated July 21, 2020, inter alia,

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FAQ :

This circular reviews and updates the inclusion of historical scenarios in stress testing for the commodity derivatives segment, addressing concerns about extreme price volatility.

Price movements corresponding to a Z-score of 10 will now replace extreme price movements beyond that threshold in peak historical returns for all commodities.

The Z-score will be calculated using the mean and sigma of returns over the applicable MPOR period across 15 years.

The circular is effective from the date of its issuance, which is December 21, 2020.

The review was initiated in light of an unprecedented event of negative final settlement prices in crude oil futures and subsequent representations to revise the historical scenario requirements.