SEBI Likely To Revise Closing Auction Rules, Restore 30-Minute VWAP For Derivatives Settlement

The Securities and Exchange Board of India (SEBI) is preparing to partially reverse its recently introduced mechanism for determining closing prices of key stocks and derivative contracts linked to them, Reuters reported.

The markets regulator last month introduced the closing auction session (CAS) for stocks that have futures and options contracts linked to them.

Under the mechanism, a brief auction conducted at the end of the trading session determines a stock's closing price. Similar systems are used in global markets, including the US and Hong Kong.

However, the mechanism has resulted in sharp movements in derivatives prices on expiry days, prompting SEBI to review the framework.

SEBI may restore 30-minute VWAP

A major change being considered involves discontinuing the use of the closing auction for calculating derivatives settlement prices for at least a year, Reuters reported, citing sources familiar with the matter.

Instead, SEBI is likely to use the volume-weighted average price (VWAP) during the final 30 minutes of trading to determine derivatives settlement prices.

For underlying stocks in the less liquid cash market, the closing auction mechanism is expected to continue determining end-of-day prices.

SEBI is expected to implement the proposed changes by the end of October.

The regulator said in a post on social media platform X over the weekend that it had received around 20,000 suggestions following a consultation paper issued last month on possible changes to the framework.

New system could align India with global markets

The revised approach could bring India's derivatives settlement mechanism closer to practices followed in major global markets.

Markets in the US and Europe frequently use dedicated mechanisms for derivatives settlement, including volume-weighted average prices calculated over specified trading periods, rather than relying solely on a single closing auction.

The proposed changes would effectively separate the mechanism used for determining derivatives settlement prices from the closing price discovery process for certain underlying shares.

The reported review comes shortly after the introduction of CAS, as SEBI evaluates market feedback and the impact of the mechanism on derivatives pricing, particularly during expiry sessions.