Why in news?
The Securities and Exchange Board of India (SEBI) has proposed easing certain risk-management norms in the commodity derivatives market, citing feedback that existing safeguards may be overly conservative and capital-intensive.
What has SEBI proposed?
- SEBI has issued a consultation paper suggesting changes to the rules governing the Settlement Guarantee Fund (SGF) of clearing corporations.
- The SGF acts as a financial buffer to absorb losses arising from member defaults in the derivatives market.
Key Change Suggested
Revision of Stress-Testing Norms
- Current framework:
- Stress tests based on 15 years of historical price data
- Extreme price movements capped using a Z-score of 10
- Proposed change:
- Reduce the Z-score threshold from 10 to 5
What is a Z-score?
- A statistical measure indicating how far a price movement deviates from its historical average.
- Expressed in standard deviations.
- Higher Z-score = more extreme and rarer market event.
- SEBI noted that a Z-score of 10 captures extremely rare events and may overstate risk.
What is the Settlement Guarantee Fund (SGF)?
The Settlement Guarantee Fund (SGF) is a financial safety net maintained by clearing corporations in Indian financial markets to ensure timely settlement of trades, even if one or more market participants default.
In simple terms, SGF guarantees completion of trades and protects the market from cascading failures due to defaults.
Who Regulates SGF?
- Securities and Exchange Board of India (SEBI) – for securities and commodity derivatives markets
- Implemented and managed by clearing corporations of stock exchanges (e.g., NSE, BSE)
