India’s markets regulator SEBI is contemplating modifications to its new closing auction regime for derivatives, following significant industry pushback and rising trading concentration at market close, aiming to improve price discovery and settlement processes.
India’s markets regulator is preparing to soften parts of its new closing auction regime after traders and other market participants pushed back against the way it is being used to settle derivatives on expiry days, according to a report by Reuters. Under the revised approach being discussed, the closing auction session would still set the end-of-day price for cash equities, but SEBI is considering changes to how that price feeds into futures and options settlement, people familiar with the matter said.
SEBI introduced the closing auction session, or CAS, for stocks with listed derivatives on August 3 to replace the old closing method, which relied on the volume-weighted average price of trades in the final 30 minutes of the session. The new system was meant to improve price discovery by using an auction at the close, but market participants have complained that the mechanism creates problems for derivative settlement, especially when trading activity becomes concentrated near the end of the day. Livemint reported that SEBI has now proposed five changes after reviewing the framework.
The regulator had already signalled that it was re-examining the design. In its consultation paper released on September 12, SEBI said the first experience with CAS, along with feedback from stakeholders, showed the need to revisit several operational issues and the settlement method for derivatives. By October 3, it had received 20,000 comments, underscoring the scale of interest in the rule changes. SEBI also said derivatives trading remained heavily focused towards the close, and that the shorter window used to determine settlement prices under CAS had become a point of concern.
In earlier disclosures, SEBI said average traded value per minute rose sharply in the final stretch of trading under CAS. On the National Stock Exchange, the figure increased from Rs 126.31 crore in the 3:00 pm to 3:30 pm period before CAS to Rs 189.82 crore during the 3:20 pm to 3:30 pm window after CAS was introduced, while on the BSE it rose from Rs 141.48 crore to Rs 288.94 crore. That data, alongside the complaints that followed the rollout, has strengthened the case for a partial rollback of the settlement changes while leaving the closing auction intact for cash-market pricing.
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