Securities and Exchange Board of India (Img: File Photo/ Pinterest)
Mumbai: The Securities and Exchange Board of India (SEBI) is reviewing the existing framework for futures and options (F&O) expiry settlements and has proposed a new blended formula to address concerns around market volatility after the introduction of the Closing Auction Session (CAS).
In a consultation paper, SEBI suggested combining the prices discovered during the last 30 minutes of continuous trading with those generated during the 10-minute closing auction window. The proposed method would use a blended Volume Weighted Average Price (VWAP) to determine the settlement price of index and stock derivatives.
The move comes after market participants raised concerns over the impact of CAS on derivatives trading, especially during expiry sessions when trading activity is heavily concentrated near market close.
Under the current system, derivative settlement prices are mainly calculated using trades executed during the final 30 minutes of continuous trading. However, with CAS introducing a separate auction-based price discovery mechanism for eligible stocks, SEBI is examining whether the existing formula needs adjustment.
The regulator said the interaction between cash market closing prices and derivatives trading requires a more balanced approach to avoid uncertainty among traders.
The first option involves introducing the new VWAP-CAS blended methodology, where both continuous trading prices and auction prices would contribute to the final settlement calculation.
The second option would allow the current settlement system to continue for some more time, giving exchanges and participants at least one year to assess the impact of CAS before implementing any major change.
The proposals indicate that SEBI is considering a gradual transition rather than an immediate overhaul of the expiry settlement mechanism.
Apart from settlement rules, SEBI has also suggested changes in the information displayed during CAS.
The regulator proposed removing the Indicative Index Value (IIV) during the auction process, while continuing to provide Indicative Equilibrium Prices (IEPs) for individual securities.
SEBI said the IIV could sometimes be misunderstood by traders as an actual traded index level, even when no transactions have taken place at that price.
SEBI is also evaluating changes in market timings around CAS. One proposal suggests extending continuous trading until 3:30 pm, followed by the auction session and a shorter derivatives trading window.
Another option would retain the current timeline with modifications to the transition period between regular trading and CAS.
The regulator is also considering restrictions on cancellation of certain limit orders during auctions and changes related to iceberg orders to improve transparency and price discovery.
SEBI has invited comments from market participants and stakeholders on the proposed changes until October 3. The feedback will help the regulator decide whether to implement the VWAP-CAS formula, continue with the existing mechanism or introduce further modifications.
The proposed reforms could significantly impact expiry-day trading strategies for investors, traders and market participants across India’s derivatives market.
