Sebi Proposes Regulatory Easing for Commodity Derivatives Clearing Corporations
The Securities and Exchange Board of India (Sebi) has put forward significant proposals to relax risk-management regulations governing clearing corporations in the commodity derivatives market. This move comes in response to industry feedback suggesting that certain existing safeguards might be excessively stringent, potentially overstating risk and imposing unnecessary capital burdens on market participants.
Revisiting Stress Test Parameters and Z-Score Thresholds
In a consultation paper released on Thursday, the market regulator highlighted concerns regarding the current framework requiring clearing corporations to conduct standardized stress tests using 15 years of historical price data. Under existing rules, extreme price movements are capped using a Z-score of 10, a statistical threshold designed to capture exceptionally rare market events.
Sebi has received representations indicating that such a high Z-score threshold may lead to an overstatement of potential risk, consequently resulting in higher capital costs for the system. A Z-score measures how far a price move deviates from its average, expressed in standard deviations, and serves as a tool to assess the extremity or unusual nature of market movements.
The regulator has now proposed lowering the Z-score to 5, asserting that this revised threshold would still adequately cover "extreme but plausible" scenarios that markets have historically encountered or could realistically face in the future.
Revising Settlement Guarantee Fund Requirements
The consultation paper also addresses concerns related to the extent of coverage provided by the Settlement Guarantee Fund (SGF), which is designed to absorb losses arising from member defaults. Currently, clearing corporations are mandated to size the fund to cover losses from the simultaneous default of at least two clearing members, along with 50% of losses that could result from the default of all clearing members.
Sebi has noted that this requirement may be disproportionate for the commodity derivatives market. The regulator pointed out that in other segments, such as equity derivatives, clearing corporations adopt a cover-based approach focused on the default of the largest clearing members, rather than assuming widespread market failure.
To address this, Sebi has proposed revising the coverage requirement so that clearing corporations calculate exposure based on the default of at least three clearing members and their associates. Additionally, the regulator suggests removing the 50% all-member default condition, aiming to create a more balanced and practical risk framework.
Alignment with Global Practices and Systemic Protection
Sebi emphasized that these proposed changes are intended to align the commodity derivatives framework more closely with international practices for central counterparties. The regulator maintains that while easing certain regulations, the revised framework will continue to ensure adequate protection against systemic risk, safeguarding market stability and investor interests.
The consultation paper invites public comments on the proposals until February 26, allowing stakeholders to provide feedback before any final implementation. This move reflects Sebi's ongoing efforts to streamline regulations, reduce operational burdens, and foster a more efficient and competitive commodity derivatives market in India.
