SEBI May Step Back From Closing Auction-Based Derivatives Settlement After Market Pushback

India’s market regulator is preparing to rethink part of its recently introduced closing-price framework after traders raised concerns over sharp swings in derivatives prices on expiry days. 

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The Securities and Exchange Board of India (SEBI) is likely to stop using closing auctions to determine derivatives settlement prices for at least a year, two people with direct knowledge of the matter told Reuters. 

Instead, settlement prices are expected to be calculated using the volume-weighted average price of the final 30 minutes of trading. 

The proposed change would amount to a partial reversal of a mechanism introduced only recently, after feedback from market participants prompted SEBI to take another look at how the system was working in practice. 

What Prompted SEBI to Reconsider the System? 

SEBI introduced the Closing Auction Session, or CAS, in August for stocks linked to futures and options contracts. 

The idea was to use a short auction at the end of the trading day to arrive at a stock’s closing price, an approach similar to systems used in markets such as the US and Hong Kong. 

But the rollout did not go entirely as planned. 

The mechanism led to sharp movements in derivatives prices on expiry days, prompting concerns from market participants and eventually a review by the regulator. 

Over the weekend, SEBI said it had received around 20,000 suggestions in response to a consultation paper issued in September. 

The Last 30 Mins of Trading May Settle the Price 

As per the method being considered, the closing auction will not set the price for derivatives. 

Rather, SEBI will adopt the volume-weighted average price, known as VWAP, in the last 30 mins of trading. 

This move will stay for at least a year. 

Auctions will not be discontinued. If the underlying stock is illiquid in the cash market, then the auction process will be continued to arrive at the close of trading price. 

As per the sources quoted in Reuters, SEBI will make this new structure operational by the end of October. 

SEBI didn’t respond to the queries put forward by Reuters. 

SEBI Rethinks Plan on Indicative Index Values 

Another part of SEBI’s review involved the information investors can see while the closing auction is underway. 

The regulator had proposed discontinuing publication of the indicative index value during the 10-minute CAS window while continuing to show indicative prices for individual stocks. 

Market participants pushed back on that proposal as well. 

Much of the feedback argued that sophisticated trading desks could calculate the indicative index level themselves. Removing it from public view, they said, could therefore reduce transparency for other investors without necessarily addressing concerns around manipulation. 

SEBI has accepted that concern, according to one of the sources cited by Reuters. 

Instead of removing the indicative index information, the regulator is expected to focus on making investors more aware that the final underlying index price is determined only at the end of the 10-minute auction window. 

Trading Hours Likely to Remain Unchanged 

Market participants also appear to have won another point: the trading timetable. 

Feedback favoured keeping regular market trading open until 3:30 pm and derivatives trading until 3:45 pm. 

Maintaining that structure is seen as helping price discovery while giving the derivatives market time to align with the closing process in the cash market. 

For SEBI, the review reflects the challenge of changing something as fundamental as how closing and settlement prices are determined. 

The regulator introduced the auction mechanism to modernise the process, but the market’s response has highlighted problems that emerged once the framework met real trading conditions. 

The likely revision does not mean closing auctions are being abandoned entirely. Instead, SEBI appears set to take a more gradual approach — retaining the mechanism where it sees a case for it, while returning derivatives settlement to a method based on trading activity during the final half-hour of the session.