In short: SEBI is reportedly likely to stop using closing auctions to work out derivatives settlement prices for at least a year, after sharp price swings on expiry days since the Closing Auction Session (CAS) began in August. Instead, the volume-weighted average price of the last 30 minutes of trading would be used. These are media reports based on unnamed sources, not an official announcement.
What has happened?
Reuters, as reported by The Hindu and ET Markets, says two people with direct knowledge of the matter expect the Securities and Exchange Board of India (SEBI) to partly reverse the CAS mechanism it brought in during August. The sources were not authorised to speak to the media, and a SEBI spokesperson did not respond to a request for comment. SEBI regulates the securities market under the Securities and Exchange Board of India Act, 1992.
The changes are expected to be announced or implemented by the end of this month, according to the reports. Until SEBI formally notifies them, the existing CAS arrangement continues.
What is the closing auction session (CAS)?
Stock exchanges started CAS on 3 August for stocks that also have futures and options (F&O) contracts. Here is how it works:
- Continuous trading in these stocks ends at 3:15 pm.
- From 3:15 pm they move into a 20-minute auction, which runs until 3:35 pm, to fix their official closing prices.
- Buy and sell orders are collected and matched at a single equilibrium price. The aim is better price discovery and less influence from last-minute trades.
- Stocks outside the F&O segment keep trading as usual until 3:30 pm.
The method is similar to what is used in markets such as the US and Hong Kong. In India, however, it has been linked to sharp swings in derivatives prices on expiry days, which led SEBI to review it.
What may change?
- Derivatives settlement: the volume-weighted average price of the last 30 minutes of trading would be used instead of the closing auction, for at least a year.
- Less liquid cash-market stocks: the closing auction would still decide the end-of-day price for the underlying stocks.
- Indicative index value: SEBI had proposed to stop publishing it during the 10-minute CAS window and show only indicative prices of individual stocks, saying the index value was still being determined. Feedback said sophisticated trading desks could rebuild these values anyway, and that removing them would reduce transparency without tackling manipulation concerns. The sources say the regulator agrees, but will push for more investor awareness that the index price is final only at the end of that window.
- Timings: feedback favoured keeping the timetable broadly as it is, with regular trading until 3:30 pm and derivatives trading until 3:45 pm.
The reports say this would bring India closer to US and European practice, where derivatives settlement often uses dedicated pricing methods such as volume-weighted averages over set periods.
The consultation
SEBI said in a post on X that it had received 20,000 comments on its consultation paper, which covered changes to CAS, market timings and the settlement method for derivatives contracts.
Who is affected, and what should you do?
Traders in index and stock futures and options are most affected, since settlement prices determine expiry-day outcomes. Investors in the cash market may see little difference, apart from the auction still applying to some stocks.
- Wait for SEBI's formal circular and the exchanges' notices before changing any strategy.
- Remember that the index price is only determined at the end of the 10-minute auction window.
- Speak to your broker if you are unsure how expiry-day settlement applies to your positions.
On the market side, ET Markets reported that capital market stocks rose by up to 4% on the news. It also noted that Jefferies said options volumes recovered in September after a sharp fall in August. This article is not investment advice.
Frequently asked questions
Has SEBI officially scrapped CAS?
No. The reports are based on unnamed sources and describe a partial reversal that is likely, not a confirmed one. CAS would reportedly stay for the end-of-day price of less liquid cash-market stocks.
What would replace the closing auction for derivatives settlement?
According to the sources, the volume-weighted average price of the last 30 minutes of trading would be used, for at least a year.
When will the changes come?
The reports say SEBI is expected to announce or implement them by the end of this month. Watch for an official SEBI circular.
Sources
- The Hindu Business: SEBI to partly reverse derivative settlement rules after pushback, sources say
- ET Markets: CAS U-turn ahead? BSE, Groww, NSE, other capital market stocks jump up to 4% amid buzz around Sebi tweaking F&O settlement rules