Sebi to Revise Derivatives Settlement Price Mechanism Under Closing Auction Session
Markets regulator Securities and Exchange Board of India (Sebi) announced on Thursday that it plans to revise the settlement price mechanism for derivatives contracts under the Closing Auction Session (CAS). The move comes exactly one month after the CAS framework was launched on August 3, following observed market volatility and feedback from market participants.
What Happened
Sebi confirmed via a regulatory release that it will soon publish a consultation paper detailing proposed revisions to the settlement pricing method for derivatives. The regulator had transitioned to CAS from the earlier Volume-weighted Average Price (V-WAP) framework for all stocks traded in the derivatives segment.
Over the first month of implementation, CAS generated noticeable market volatility and occasionally caused differences in closing prices between the two stock exchanges. While CAS is standard internationally for closing price discovery, recent sessions in India witnessed price fluctuations. Volatility was observed during weekly and monthly futures and options (F&O) expiry dates, including August 13, August 27, and again on Thursday.
Key Highlights
- Consultation Paper Forthcoming: Sebi will release a consultation paper to gather input on adjusting the derivatives settlement price determination under CAS.
- Shift from V-WAP: The CAS framework replaced the earlier Volume-weighted Average Price mechanism for derivatives-traded stocks on August 3.
- Regulatory Monitoring: Sebi chairman Tuhin Kanta Pandey previously stated on at least two occasions that the core CAS process would remain, but adjustments could be made following an examination of trading data.
- Past Enforcement: On August 20, Sebi penalised Copthall, a JP Morgan entity registered as a foreign portfolio investor (FPI), alongside domestic broker Mansi Broking, for manipulating Sensex levels during CAS on the August 13 expiry session.
- Stakeholder Engagement: The regulator noted it engaged with stock exchanges, mutual funds, brokers, proprietary traders, software vendors, industry associations, and FPIs during the rollout period.
Why This Matters
The determination of closing prices plays a direct role in setting the expiry settlement prices of derivative contracts. Feedback received by Sebi across multiple channels, including social media platforms, highlighted significant concerns regarding how derivative contract settlement prices are calculated at expiry using CAS closing prices. In addition, discrepancies between exchange closing prices and sharp volatility during expiry sessions prompted the regulator to address these operational and market impacts.
What to Watch Next
Sebi will issue a formal consultation paper to propose changes to the settlement price mechanism for derivatives contracts. Market participants, including brokers, institutional investors, and exchanges, will be able to review the specific modifications once the regulator publishes the document.
Frequently Asked Questions
When was the Closing Auction Session introduced?
The Closing Auction Session was implemented by Sebi on August 3 for all stocks traded in the derivatives segment, replacing the previous V-WAP system.
Why is Sebi reviewing the mechanism?
The review follows feedback regarding expiry settlement prices, observed instances of sharp index volatility on expiry days, and closing price variations between exchanges during the first month of operation.
Has Sebi taken enforcement action related to CAS?
Yes. On August 20, Sebi penalised domestic broker Mansi Broking and FPI entity Copthall for manipulating Sensex levels during the August 13 Closing Auction Session.
Source: Based on reporting by The Times of India and an official release by Sebi.