SEBI rationalises stress testing norms for Commex

The commodity and capital market regulator SEBI has rationalised the historical scenarios in stress testing in the commodity derivatives segment which could lead to lower margin collection from investors.

In light of an unprecedented event of negative final settlement price like in the case of crude oil futures in the recent past, SEBI had prescribed an Alternate Risk Management Framework that would be applicable in case of near zero or negative prices for any underlying commodities futures.

This has empowered exchanges to collect up to 130 per cent of margin for commodity futures and investors had made a representation to the SEBI on such high margins.

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Pursuant to this, 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.

The Risk Management Review Committee of SEBI had deliberated on the issue. In line with the recommendations of the committee had inserted a clause in the existing norms to address the concerns emanating from exceptional and extreme volatile price events.

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“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 margin period of risk (MPOR) across 15 years would be used for calculation of the Z-score,” it said.

The changes in the Alternate Risk Management Framework would come into effect from Monday, said SEBI.

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