India’s markets regulator, SEBI, is considering changes to how derivatives expiry-day prices are calculated, aiming to reduce volatility and better align cash and derivatives markets following concerns over market distortions caused by recent auction mechanisms.
India’s markets regulator is working on changes to how derivatives expiry-day settlement prices are calculated, after traders raised concerns that the current system has amplified volatility and distorted closing prices. SEBI chairman Tuhin Kanta Pandey said at the JPMorgan India conference that the review is under way, underscoring the regulator’s effort to keep cash and derivatives markets more closely aligned.
The issue has gained urgency since the introduction of the closing auction session, or CAS, which sets the final price in the cash market. Market participants say the new mechanism has created order imbalances and sharp moves near the close, especially on futures and options expiry days. According to reports from Business Standard and Mint, SEBI has already circulated a consultation paper proposing changes to the settlement formula and inviting comments from the market.
Among the options being examined is a blended volume-weighted average price, or VWAP, approach that would combine trades from the final 30 minutes of continuous trading with the 10-minute auction session. Another option would revert to the earlier VWAP method based only on continuous trading. Kotak Neo reported that SEBI wants the closing auction to remain part of market structure, but is reconsidering how much weight it should carry in derivative settlement.
Pandey also said the regulator wants to improve cash-market liquidity, price discovery, stock lending and borrowing, hedging and arbitrage. The broader aim is to make expiry-day pricing less prone to manipulation or abrupt divergence between the cash and derivatives segments. Public comments on the consultation are due by October 3, according to the materials circulated by SEBI and reported by multiple outlets.
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