India's market regulator, the Securities and Exchange Board of India (SEBI), is reportedly set to retain the current 30-minute Volume-Weighted Average Price (VWAP) methodology for determining the settlement price of index and stock derivatives on expiry days. The recommendation comes from SEBI's Secondary Market Advisory Committee (SMAC), which has opposed an immediate transition to a new, blended formula.
The committee's decision, as reported by Moneycontrol, suggests that the existing method, which uses the VWAP of trades executed between 3:00 PM and 3:30 PM during the continuous trading session, should be kept for at least one year. This approach aims to address significant concerns raised by market participants following the introduction of the Closing Auction Session (CAS) for stocks in the futures and options (F&O) segment.
Concerns Over CAS Introduction
The CAS mechanism was implemented in the equity cash segment for F&O stocks on August 3, 2026. Its primary goal was to enhance efficient and transparent price discovery for closing prices. However, its introduction sparked worries among market participants regarding potential price volatility and the impact of auction-derived prices on derivatives settlement.
SEBI had acknowledged these concerns, stating that initial experiences with CAS and feedback from stakeholders highlighted the need to review certain aspects of the framework and its settlement methodology for derivatives. Consequently, the regulator released a consultation paper on September 12, seeking public comments on various operational elements of the CAS framework.
SEBI's Consultation and Committee's Stance
The September 12 consultation paper had presented two options for calculating the settlement price: either a blended VWAP that integrated trades from the final 30 minutes of continuous trading and the subsequent 10-minute auction, or the retention of the Continuous Trading Session (CTS)-only VWAP as an interim measure.
SMAC has now firmly recommended the latter, advocating for the continued use of the CTS-only VWAP for at least a year. This interim arrangement is intended to provide stability and allow for further evaluation before any potential shift to a more complex, blended methodology that includes CAS prices.
“The committee has recommended retaining this method for at least a year before the regulator considers switching to a new methodology,” a Moneycontrol report stated, quoting sources familiar with the discussions.
This move underscores SEBI's responsiveness to market feedback, prioritizing stability and confidence in derivatives trading settlement amidst evolving regulatory frameworks.