The Securities and Exchange Board of India vide its notification dated 21st December 2020 has rationalized the historical scenarios in stress testing in the commodity derivatives segment which could lead to lower margin collection from investors.
SEBI in its earlier circular had prescribed norms related to Stress Testing for the commodity derivatives segment, which included norms regarding historical scenarios and had prescribed an Alternate Risk Management Framework that would be applicable in case of near-zero and/or negative prices for any underlying commodities/futures.
However, SEBI had received representation to review the requirement of including all the price movements during the last 15 years, in the historical scenarios prescribed for stress testing, therefore based on the review sebi had recommended that the Price movements corresponding to a Z-score of 10 will replace extreme price movements beyond that threshold in peak historical returns of all the commodities. Mean and sigma of returns over the applicable MPOR period across 15 years would be used for calculation of the Z-score.
