**Summary:**
This circular, reference number SEBI/HO/CDMRD/DMP/CIR/P/2020/244 and dated December 21, 2020, issued by the Securities and Exchange Board of India (SEBI), addresses the review of historical scenarios used in stress testing for the commodity derivatives segment. It amends the guidelines outlined in previous circulars SEBI/HO/CDMRD/DMP/CIR/P/2018/111 dated July 11, 2018, and SEBI/HO/CDMRD/DMP/CIR/P/2020/128 dated July 21, 2020, which prescribed norms related to Stress Testing for the commodity derivatives segment, including norms regarding historical scenarios. This review was prompted by representations received following the issuance of circular SEBI/HO/CDMRD/DMP/CIR/P/2020/176 dated September 21, 2020, which prescribed an Alternate Risk Management Framework that would be applicable in case of near zero and or negative prices for any underlying commoditiesfutures, specifically regarding the inclusion of all price movements over the last 15 years in historical stress testing scenarios. Following deliberation by SEBI's Risk Management Review Committee (RMRC), the circular introduces a modification to the historical scenario methodology. Specifically, 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. The mean and sigma of returns over the applicable MPOR period across 15 years would be used for calculation of the Z-score. This change is inserted after Para 1 of Part A of Annexure to the SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2018/111 dated July 11, 2018. The circular, effective from the date of issuance, is issued under the authority granted by Section 11(1) of the Securities and Exchange Board of India Act, 1992, and Section 10 of the Securities Contracts Regulation Act, 1956. The intention is to protect investors' interests, promote market development, and regulate the securities market, while addressing concerns related to exceptional price volatility. The circular is available on the SEBI website (www.sebi.gov.in). For further information, contact Vishal V. Nair, Deputy General Manager, Division of Risk Management, Commodity Derivatives Market Regulation Department, at vishaln@sebi.gov.in.
Key Entities Referenced
SEBI: Securities and Exchange Board of India, the regulator of the securities market in India.
Commodity Derivatives Segment: A segment of the financial market dealing with derivative products related to commodities.
SEBI Circular SEBIHOCDMRDDRMPCIRP2018111: A circular issued by SEBI on July 11, 2018, pertaining to norms related to Stress Testing for the commodity derivatives segment.
SEBI Circular SEBIHOCDMRDDRMPCIRP2020128: A circular issued by SEBI on July 21, 2020, pertaining to norms related to Stress Testing for the commodity derivatives segment.
Crude Oil Futures Markets: Markets dealing with futures contracts for crude oil.
SEBI Circular SEBIHOCDMRDDRMP CIRP2020176: A circular issued by SEBI on September 21, 2020, prescribing an Alternate Risk Management Framework for commodity futures with near zero or negative prices.
Risk Management Review Committee RMRC: A committee within SEBI responsible for reviewing risk management practices.
Securities and Exchange Board of India Act 1992: The act of the Parliament of India that established the Securities and Exchange Board of India (SEBI).
CIRCULAR
SEBI/HO/CDMRD/DRMP/CIR/P/2020/244 December 21, 2020
To,
The Managing Directors / Chief Executive Officers,
All Clearing Corporations having Commodity Derivatives Segment
Sir / Madam,
Sub: Review of inclusion of Historical Scenarios in Stress Testing in Commodity
Derivatives Segment
1. SEBI vide Circular SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated July 11, 2018
and SEBI/HO/CDMRD/DRMP/CIR/P/2020/128 dated July 21, 2020, inter alia, had
prescribed norms related to Stress Testing for the commodity derivatives segment,
which included norms regarding historical scenarios.
2. In light of an unprecedented event of negative final settlement price in the crude oil
futures markets in the recent past, SEBI vide circular SEBI/HO/CDMRD/DRMP/
CIR/P/2020/176 dated September 21, 2020 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.
3. Pursuant to the issuance of the above circular, SEBI 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.
4. The matter was deliberated upon in the Risk Management Review Committee
(RMRC) of SEBI. In line with the recommendations of the RMRC, following clause
stands inserted after Para ‘1’ of Part ‘A’ of Annexure to the SEBI Circular
SEBI/HO/CDMRD/DRMP/ CIR/P/2018/111 dated July 11, 2018 with a view to
address the concerns emanating from exceptional and extreme volatile price
events:-
Page 1 of 2“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.”
5. The circular shall be effective from the date of its issuance.
6. This circular is issued in exercise of the powers conferred under Section 11(1) of
the Securities and Exchange Board of India Act 1992, read with Section 10 of the
Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in
securities and to promote the development of, and to regulate the securities
market.
7. This circular is available on SEBI website at www.sebi.gov.in.
Yours faithfully,
Vishal V. Nair
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
vishaln@sebi.gov.in
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