Regulator lowers the Z-score limit from 10 to 5, easing the framework for assessing extreme price movements.
The Securities and Exchange Board of India (SEBI), as per the latest reports, has reduced the Z-score threshold used for stress testing in the commodity derivatives market from 10 to 5. The change is aimed at simplifying the existing framework while continuing to account for sharp price movements in commodity contracts.
The decision comes as SEBI continues to review rules governing the commodity derivatives segment, including measures intended to improve operational efficiency and make compliance requirements more practical for market participants.
More about the Z-score change.
A Z-score is used in statistical analysis to measure how far a particular observation is from the average. In commodity derivatives, the measure is relevant when exchanges and clearing entities assess unusually large price movements and their potential impact on market risk.
Under the earlier framework, price movements associated with a Z-score of 10 were used to replace extreme observations above that threshold in historical commodity return data. SEBI has now brought that threshold down to 5. In practical terms, the revised threshold changes how extreme historical price movements are treated during stress-testing exercises. The objective is to create a more standardised approach to measuring potential market stress.
Focus on compliance and market stability.
The reduction is being viewed as part of SEBI’s broader efforts to streamline regulations without removing the risk-management framework surrounding commodity derivatives. Commodity futures and options can be subject to significant price fluctuations due to changes in global supply and demand, currency movements, geopolitical developments, and weather conditions. Stress testing therefore plays an important role in assessing whether market infrastructure can withstand sharp movements.
SEBI’s investor education material notes that derivatives are commonly used for hedging and managing price risk. The regulator has also been reviewing other aspects of the commodity derivatives framework. In May 2026, SEBI issued a consultation paper seeking comments on position limits for clients and penalties for breaches in the commodity derivatives segment. The revised Z-score limit is primarily a change in the methodology used for stress testing, rather than a change in the underlying purpose of risk controls.
For exchanges, clearing corporations and other market participants, the move could make the stress-testing process more consistent and easier to administer. At the same time, the broader objective remains to ensure that extreme commodity price movements are appropriately reflected in risk assessments.
The latest decision highlights SEBI’s continuing effort to balance commodity derivatives market stability, risk management and regulatory compliance as trading activity and market conditions evolve.
