The Securities and Exchange Board of India (SEBI) is reportedly considering a significant change to how derivatives contracts are settled on their expiry days. Following feedback from market participants, the regulator has indicated it will review the methodology for determining settlement prices, potentially reinstating an older model for weekly and monthly expiries.
Review of Closing Auction Session (CAS) Framework
SEBI introduced the Closing Auction Session (CAS) framework on August 3, aiming to enhance the price-discovery process for eligible securities around market close. The system was designed to determine the closing prices, but its implementation has led to unexpected market dynamics.
Market Concerns Prompt SEBI Action
Since its rollout, CAS has drawn criticism from various stakeholders. Market participants highlighted issues such as divergent index closing levels across different exchanges, increased volatility in options prices, and concerns over potential price manipulation, particularly on derivatives expiry days. One notable instance involved the Sensex briefly falling around 2.5 percent during a CAS session, accompanied by a reported 400-500 percent surge in premiums for some Sensex put options.
Potential Return to VWAP or Hybrid Model
According to reports, SEBI may propose reverting to the earlier volume-weighted average price (VWAP) mechanism for settling weekly and monthly derivatives contracts, or a combination of VWAP and CAS prices. While the daily closing auction session for the equity cash market is expected to remain, these changes would mark a partial modification to the CAS framework.
SEBI announced last Thursday its intention to review the settlement price methodology and confirmed that a discussion paper outlining the proposed changes would be issued within a week. While a LiveMint report cited sources on the potential return to VWAP, Business Today has not independently verified these claims at the time of publishing.
Impact on Market Stability
The regulator's swift response underscores its commitment to maintaining market stability and addressing participant concerns. Any adjustments to the derivatives settlement process could have a significant impact on trading strategies and overall market confidence, particularly in the highly active Indian derivatives segment.