The market regulator will issue new guidelines for price settlement in the derivatives segment during the closing auction session in about a week, said the Securities and Exchange Board of India (Sebi) chairman, Tuhin Kanta Pandey, on Saturday.“Following review of the Closing Auction Session (CAS), a consultation paper was put out to address concerns in respect of the settlement price of derivatives on expiry day.
We are currently examining the comments and hope to issue guidelines in about a week’s time,” Pandey said at a BSE Broker’s Forum event. CAS was introduced on 3 August to determine closing prices for select futures and options (F&O) stocks in India, replacing the previously used volume-weighted average price (VWAP) mechanism.
However, the framework ran into several issues just a month into its operations, attracting backlash from market participants. One of the major concerns was abrupt price swings and uncertainty on expiry days in the derivatives market. In response, the market regulator issued a consultation paper to review the settlement methodology for derivatives contracts.
Sebi suggested that expiry-day settlement prices for index and stock derivatives could be calculated using trades from the last 30 minutes of the continuous trading session (CTS) and the last 10 minutes of the closing auction session, under a blended volume-weighted average price approach.
As an alternative, the regulator has initially proposed retaining the existing VWAP methodology, with settlement based only on trades in the final 30 minutes of continuous trading, before potentially shifting to the blended approach after at least a year of experience with CAS.
Sebi has also proposed stopping the dissemination of the indicative index value (IIV) during CAS while continuing to provide indicative equilibrium prices (IEPs) for individual securities. The draft paper said that the IIV, derived from evolving lEPs, can be mistaken for an actual index level, even if no trades have taken place at that level.
Indicative Equilibrium Price and Indicative Index Value are real-time estimates displayed during the stock market's closing auction session. On market timings, the market regulator has suggested two alternatives. Under the first, CTS for CAS stocks would run until 3:30pm, followed by CAS from about 3:30pm to 3:40pm, with derivatives trading continuing until 3:45pm.
Under the second, the existing 3:15pm cut-off for CTS in CAS stocks would remain, CAS would run until 3:25pm, and derivatives trading would end at 3:30pm. The regulator has separately proposed reducing the transition period between CTS and CAS from 5 minutes to up to 1 minute, while shortening the post-CAS derivatives trading window from 10 minutes to 5 minutes.
The consultation paper was open to feedback until 3 October.