Sebi Proposes Changes to Expiry Settlement Methodology Amid CAS Concerns

The Securities and Exchange Board of India (Sebi) has proposed a revamp of the closing auction session (CAS) framework following concerns that the month-old system was leading to abrupt price swings and market uncertainty. In a consultation paper issued on Saturday, the market regulator suggested expiry-day settlement prices for index and stock derivatives could be calculated using trades from the last 30 minutes of the continuous trading session (CTS) and 10 minutes of the closing auction session (CAS), under a blended volume-weighted average price (VWAP) approach. The regulator has also proposed retaining the existing VWAP methodology initially, with settlement based only on trades during the final 30 minutes of continuous trading, before potentially shifting to the blended approach after at least a year of experience with CAS. Sebi's review follows feedback from market participants about the interaction between cash and derivatives markets during CAS, price movements in certain index option contracts, and so on. The regulator noted that derivatives activity remains concentrated near the close, with trading during the 10-minute CAS period accounting for 4.13% of the day's premium turnover on NSE and 6.79% on BSE in the period studied. Sebi has also proposed stopping the dissemination of the indicative index value (IIV) during CAS while continuing to provide indicative equilibrium prices (IEPs) for individual securities. The draft paper said that the IIV, derived from evolving IEPs, can be mistaken for an actual index level, even if no trades have taken place at that level. On market timings, the market regulator has suggested two alternatives. Under the first, CTS for CAS stocks would run until 3:30pm, followed by CAS from about 3:30pm to 3:40pm, with derivatives trading continuing until 3:45pm. Under the second, the existing 3:15pm cut-off for CTS in CAS stocks would remain, CAS would run until 3:25pm and derivatives trading would end at 3:30pm. The regulator has separately proposed reducing the transition period between CTS and CAS from five minutes to up to one minute, while cutting the post-CAS derivatives trading window from 10 minutes to five minutes. Another proposal seeks to curb the cancellation of limit orders placed beyond 1% from the reference price during CAS. Such orders could continue to be placed within the existing 3% plus or minus price band, but once they move beyond 1% plus or minus price band, they could not be cancelled. Traders would only be allowed to improve the price. Sebi has also proposed allowing unexecuted quantities from iceberg orders to move into CAS as normal limit orders, with the entire pending quantity disclosed in the auction order book. The aim is to ensure that genuine trading interest remaining at the end of continuous trading contributes to closing-price discovery. A consultation paper has been invited on the seven proposals until 3 October.