BSE Climbs Nearly 5% on SEBI's Derivatives Settlement Review Plan

BSE shares gained nearly 5% on September 4 after the Securities and Exchange Board of India (SEBI) said it would review the methodology used to determine settlement prices of derivative contracts following feedback received after the implementation of the Closing Auction Session (CAS). 

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At around 10:10 am, shares of BSE were trading 4.5% higher at ₹3,453.8 apiece, reacting to the regulator's latest announcement. 

SEBI introduced the Closing Auction Session on August 3 to determine the closing prices of securities in the equity cash market. However, the rollout of the mechanism brought several issues into focus, prompting feedback from market participants and stakeholders. 

According to the regulator, concerns emerged around divergent index closing levels across exchanges, volatility in options pricing and the possibility of manipulation, particularly on days when benchmark derivative contracts expire. 

Following the feedback received, SEBI said it is considering changes to the methodology used for determining settlement prices of derivative contracts. 

One of the key concerns highlighted by the regulator relates to the settlement of derivative contracts on expiry using closing prices determined through the Closing Auction Session. 

In its statement, SEBI said it had reviewed the experience from the initial phase of CAS implementation and considered the feedback received from various stakeholders before taking the next step. 

“Having considered the experience of the initial period of CAS implementation and the feedback received from various stakeholders, SEBI may be proposing certain changes in the methodology for determination of settlement prices of derivative contracts,” the regulator said. 

The regulator added that feedback from stakeholders had highlighted issues surrounding the current settlement-price determination mechanism, leading it to examine possible revisions. 

The review comes just over a month after the introduction of the Closing Auction Session, which was launched to determine closing prices in the equity cash market. 

A significant area of focus for SEBI remains the methodology used for determining settlement prices of derivative contracts on expiry days when CAS-generated closing prices are used as the reference point. 

The market regulator also said it would issue a discussion paper outlining the proposed changes. The paper will set out SEBI's proposals regarding the methodology for determining settlement prices of derivative contracts following the experience gained from the initial implementation of the Closing Auction Session. 

The proposed review follows stakeholder feedback on the functioning of the new mechanism and concerns surrounding index-closing levels, options pricing behaviour and settlement outcomes after the introduction of CAS.