Sebi weighs changes to derivatives settlement, closing auction session

The Securities and Exchange Board of India (Sebi) on Saturday proposed changes to the settlement methodology for derivatives, market timings, and some operational aspects of the Closing Auction Session (CAS), weeks after the new closing price mechanism came into effect. 

The CAS framework was introduced in the equity cash segment for stocks with listed derivatives from August 3, 2026, replacing the earlier system under which closing prices were determined using the volume-weighted average price (VWAP) of trades executed during the last 30 minutes of continuous trading. 

Under CAS, the closing price is determined through an equilibrium price discovery mechanism based on aggregate buy and sell orders in the auction book. 

Derivatives activity remains high near close 

Sebi said its initial experience and feedback from stock exchanges, brokers, institutional investors, and other market participants have highlighted the need to review aspects of CAS and derivatives settlement. 

A key concern is the continued concentration of derivatives trading towards the end of the session, particularly on expiry days. While the underlying securities undergo the CAS price discovery process, derivatives continue to trade, allowing participants to respond to evolving indicative prices. 

On the NSE, the average derivatives traded value per minute increased to ₹189.82 crore during the 3:20 p.m. to 3:30 p.m. period under CAS, from ₹126.31 crore during the corresponding 3:00 p.m. to 3:30 p.m. period before CAS. On the BSE, the average rose to ₹288.94 crore from ₹141.48 crore. 

Activity was also recorded during the five-minute transition period between the end of continuous trading and the start of CAS. Average premium turnover during this period accounted for 1.72% of the day's premium turnover on NSE and 1.57% on BSE. 

On expiry days, the average premium traded during the transition period stood at ₹791.50 crore on NSE and ₹668.38 crore on BSE. 

Indicative prices and derivatives trading 

Sebi also flagged the interaction between the cash and derivatives markets during CAS. The Indicative Equilibrium Price (IEP) emerging during CAS is different from an executed traded price. It represents the equilibrium price based on orders available in the auction book at a particular point and can change until the auction concludes. 

However, feedback suggests that market participants are using indicative price information during CAS, particularly in its initial minutes, while taking positions in derivatives. 

Sebi said this assumes greater significance given the high activity in expiring index options and the participation of retail investors, with both option buyers and sellers potentially facing greater uncertainty when CAS closing prices determine derivatives settlement values. 

Two options for derivatives settlement 

The regulator has proposed two approaches for determining expiry-day settlement prices. 

Under the first option, settlement prices for both index and single-stock derivatives would be based on a Blended VWAP, combining actual trades executed during the last 30 minutes of continuous trading and the 10-minute CAS. 

For index derivatives, the contribution of the continuous trading and CAS periods would be determined by the actual traded value in each period. No fixed or predetermined weighting would be assigned to either period. 

Under the second option, Sebi has proposed retaining the pre-CAS methodology temporarily. The expiry-day settlement price would be based only on trades executed during the last 30 minutes of continuous trading, or the CTS VWAP. 

Transactions executed during CAS would therefore not form part of the settlement calculation during this interim period. 

Sebi said the two options differ mainly in their timing rather than their intended long-term direction. Under both approaches, the eventual framework would incorporate actual transactions from both the last 30 minutes of continuous trading and the 10-minute CAS period into the derivatives settlement price. 

The regulator is also seeking views on the relative timing and duration of continuous trading, CAS and derivatives trading, along with certain operational aspects of CAS and information dissemination. 

As per the release, the consultation seeks to clarify the distinction between the IEP during the auction, the final closing price determined at the end of CAS, and the settlement price of derivatives contracts under the proposed methodology.