SEBI Proposes Lower Z-Score for Commodity Derivatives Stress Tests

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  • Last Updated on 8 February, 2026

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SEBI Z-score stress testing

Consultation Paper Dated 05.02.2026

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing to reduce the Z-score threshold from 10 to 5 for the inclusion of historical scenarios in standardised stress testing for the commodity derivatives segment.

1. Existing Stress Testing Framework

Under the current framework:

  • Historical price scenarios with extreme price movements are included in stress testing
  • Such movements are identified using a Z-score threshold of 10, which captures highly extreme and infrequent market events

SEBI has observed that this threshold may result in overly conservative stress outcomes, particularly in the commodity derivatives market.

2. Proposed Change in Z-Score Threshold

Under the proposal:

  • The Z-score threshold will be reduced from 10 to 5
  • Price movements corresponding to a Z-score of 5 will be considered for stress testing
  • Extreme price movements beyond the Z-score of 5 will be replaced by the capped movements at the Z-score 5 level in peak historical returns

This change is intended to strike a balance between prudence and realism in stress testing.

3. Rationale for the Proposal

The proposal is based on:

  • Recommendations of the Risk Management Review Committee
  • Representations received from market stakeholders highlighting the need for a more calibrated stress-testing approach

SEBI has acknowledged that while stress tests should remain robust, they should also reflect practical market behaviour and avoid undue strain on market participants.

4. Impact on Commodity Derivatives Segment

If implemented, the proposal is expected to:

  • Moderate extreme stress test results
  • Improve risk calibration without compromising systemic safety
  • Enhance operational efficiency for exchanges and clearing corporations

5. Invitation for Public Comments

SEBI has invited public comments and suggestions on the consultation paper, considering its implications for exchanges, clearing corporations, and commodity derivatives market participants.

Stakeholders are encouraged to provide feedback to assist SEBI in finalising the proposed framework.

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied