The Securities and Exchange Board of India is likely to issue a consultation paper on the Closing Auction Session as early as Saturday, sources told CNBC-TV18. Among the proposals being considered is a move to stop displaying indicative prices during the CAS window, sources said.
The regulator is specifically reviewing how closing prices discovered through CAS should be used to settle derivative contracts on expiry days, SEBI Chairman Tuhin Kanta Pandey said earlier this week. CAS was introduced in the equity cash segment on August 3, replacing the earlier volume-weighted average price method for stocks with corresponding derivatives.
Under the new system, continuous trading ends at 3:15 pm, followed by a 20-minute auction in which orders are matched to determine an equilibrium closing price. The mechanism was designed to improve price discovery, concentrate liquidity towards the close and reduce tracking errors for passive funds.
However, its use as the basis for derivatives settlement has triggered concerns among market participants. SEBI has indicated that the auction itself will remain, but the methodology for determining F&O settlement prices could change. Options under consideration include returning to a VWAP-based settlement for certain expiry-day contracts or adopting a hybrid methodology combining VWAP and CAS prices.
Liquidity, volumes raise questions after CAS rolloutThe concerns have come into sharper focus after the first month of CAS operations. Market participants have flagged sharp moves in benchmark indices around derivatives expiry days, while liquidity during the auction window has emerged as a key issue.
The concern is that a closing price formed in a relatively thin market can have an outsized impact when it is subsequently used to settle derivatives. BSE Managing Director and CEO Sundararaman Ramamurthy has said the exchange is holding meetings with dealers to understand the decline in trading activity since CAS was introduced.
Some measures of premium turnover and contracts traded have fallen 10-20% from July levels, according to the exchange. At BSE, turnover during the CAS window averages only about ₹10-20 crore, although it can rise sharply on unusual trading days. Ramamurthy said greater participation from both buyers and sellers was necessary for the auction to work effectively.
Dealers have suggested several changes, including delinking F&O expiry settlement from the CAS price, introducing the mechanism gradually and modifying rules governing price bands and order changes near the close. BSE is collating the feedback before taking it to regulators.
SEBI has itself said the feedback received since the rollout has highlighted settlement-price determination as a significant area of concern. The regulator has monitored CAS through its initial month and consulted exchanges, brokers, institutional investors, FPIs and other market participants.