CAS concerns: SEBI proposes 2 options for F&O settlement, trade timing after expiry-day volatility

A little over a month after introducing the Closing Auction Session (CAS), the Securities and Exchange Board of India (SEBI) has proposed revising derivatives settlement rules and market timings amid concerns over expiry-day trading and investors’ interpretation of indicative prices.

In a consultation paper issued on Saturday (September 12), SEBI outlined two settlement alternatives: combine continuous-market trades with closing-auction transactions or temporarily return to the method used before CAS began on August 3. The regulator has sought public comments until October 3.

The review follows feedback from exchanges, brokers, institutional investors and other participants. SEBI said concerns included movements in indicative index values during the auction and sharp changes in certain index options nearing expiry.

Data in the paper showed that average premium turnover per minute in expiring benchmark index options during the 10-minute auction stood at Rs 189.82 crore on NSE and Rs 288.94 crore on BSE. Before CAS, the corresponding averages during the final 30 minutes of trading were Rs 126.31 crore and Rs 141.48 crore. The post-CAS sample covered five expiries on each exchange.

CAS currently determines closing prices for cash-market stocks on which derivatives are available. These auction-based closing prices also feed into expiry-day derivatives settlement. Before its introduction, settlement relied on prices derived from the final 30 minutes of continuous trading.

SEBI said market participants had flagged greater uncertainty for both option buyers and sellers when auction closing prices determine expiry-day settlement.

Its first proposal, called “Blended VWAP”, would use transactions from the last 30 minutes of the Continuous Trading Session (CTS) and the 10-minute CAS period. VWAP refers to the volume-weighted average price.

The contribution of each period would reflect actual traded value, with no predetermined weighting. For single-stock derivatives, the calculation would incorporate transactions across exchanges. According to SEBI, this would capture a broader period of actual market activity.

The second option would restore the pre-CAS approach for an interim period, using only transactions from the final 30 minutes of continuous trading. Auction trades would be excluded from settlement calculations.

SEBI said a subsequent move to blended pricing could be considered no earlier than one year after the revised settlement method takes effect. The transition would not be automatic and liquidity, participation, investor familiarity and the auction’s performance across market conditions would first be assessed.

SEBI has proposed two possible schedules for aligning continuous trading, the closing auction and derivatives trading.

Under Option A, continuous trading in all stocks would end at 3.30 pm. After a transition of about one minute, CAS would run from 3.31 pm to 3.40 pm, with derivatives trading continuing until 3.45 pm.

Option B would retain the 3.15 pm continuous-trading close for CAS stocks. The auction window would run until 3.25 pm, including a transition of about one minute and derivatives trading would end at 3.30 pm. Non-CAS stocks would continue trading until 3.30 pm.

Both alternatives would cut the transition period from five minutes to up to one minute and halve the post-auction derivatives window to five minutes. SEBI said participants considered a shorter window sufficient to manage positions after closing prices were determined.

SEBI also wants exchanges to stop displaying the Indicative Index Value derived from individual stocks’ Indicative Equilibrium Prices during CAS. Stock-level indicative prices would remain available.

The regulator said these evolving auction values do not represent executed transactions. Some participants were misinterpreting the indicative index value and taking derivatives positions based on it.

On orders, SEBI proposed prohibiting cancellations where limit orders are placed or modified beyond 1% on either side of the reference price. Price-improving modifications would remain permitted within the unchanged overall band of ±3%.

Unexecuted Iceberg orders, which disclose only part of their quantity during continuous trading, could also move into CAS as normal limit orders, with the entire pending quantity visible.

Comments can be submitted through SEBI’s public-comment mechanism. If technical problems prevent submission, participants may email mrdcas@sebi.gov.in.