The Securities and Exchange Board of India has proposed significant changes to the way settlement prices are determined for futures and options contracts on expiry days, following concerns over market behaviour after the introduction of the Closing Auction Session.
The proposals are part of a consultation process and have not yet been finalised. SEBI has invited public comments from market participants and other stakeholders before taking a final decision. Feedback on the proposals can be submitted until October 3, 2026.
The latest review follows the introduction of the Closing Auction Session in the equity cash segment for stocks with derivatives contracts from August 3, 2026. The system was introduced with the objective of improving the transparency and efficiency of closing price discovery.
However, concerns emerged about volatility and price movements around the market close, particularly on derivatives expiry days. This prompted SEBI to review the relationship between the cash market closing process and the settlement mechanism used for futures and options contracts.
One of the most important proposals concerns the method used to calculate the final settlement price for index and stock derivatives.
SEBI has proposed a Blended Volume Weighted Average Price method as one possible approach. Under this proposal, the settlement price would be calculated using trades from the final 30 minutes of normal trading along with trades conducted during the 10 minute Closing Auction Session. The two periods would be combined on the basis of traded value to determine the final settlement price.
The regulator has also presented a second option. Under this approach, the settlement price would be based only on trading during the final 30 minutes of continuous trading. The Closing Auction Session would not be included in the settlement calculation for derivatives for an interim period of one year.
This alternative would effectively separate the derivatives settlement process from the Closing Auction Session during the proposed period.
SEBI is therefore seeking feedback on whether a blended calculation would provide a better link between the cash market closing process and derivatives settlement or whether the earlier continuous trading based approach should continue temporarily.
The regulator has emphasised that the review should not be interpreted as a decision to withdraw the Closing Auction Session. Instead, the consultation process is aimed at refining the framework after observing market behaviour following its implementation.
The consultation paper also includes proposals relating to market timings.
SEBI is considering changes to the scheduling of the Closing Auction Session and has placed alternative timing arrangements for consultation. The regulator has also proposed reducing the transition period between trading sessions to one minute and shortening the futures and options trading window following the auction process to five minutes.
Another important proposal relates to the display of indicative prices during the Closing Auction Session.
SEBI has suggested stopping the dissemination of indicative index closing values during the auction. The regulator's review noted concerns surrounding the use of values derived from the Indicative Equilibrium Price because such values may not represent prices at which trades have actually been executed.
However, the proposal would continue the dissemination of the Indicative Equilibrium Price for individual stocks during the Closing Auction Session.
The regulator has also proposed tighter rules concerning certain limit orders. One proposal would restrict the cancellation of limit orders placed more than 1 percent above or below the relevant reference price. The measure is intended to address order behaviour during the closing process and support a more orderly market environment.
Other proposals include maintaining the existing 3 percent price band for the Closing Auction Session and allowing the use of iceberg orders during the auction process. These suggestions form part of SEBI's broader review of how the market operates around the closing period and how settlement prices are established on derivatives expiry days.
The proposed changes are important for traders, brokers, institutional investors and other participants in India's derivatives market because expiry day settlement prices can directly affect the final value of futures and options contracts.
A settlement mechanism that closely reflects transparent and genuine market trading is considered important for market confidence. At the same time, regulators must consider whether changes in the closing process create unintended differences between cash market prices and derivatives settlement values.
SEBI's latest consultation attempts to address this balance.
The regulator is examining whether a Blended VWAP formula can provide a more representative settlement price by including trading from both the final 30 minutes of continuous trading and the Closing Auction Session. At the same time, it has provided an alternative that would temporarily return to a continuous trading based calculation.
The final framework will depend on SEBI's assessment of stakeholder comments and its review of market data and operational considerations. Market participants are therefore waiting for the regulator's final decision on the future structure of expiry day settlement.
For now, the proposals represent a review and refinement of the existing framework rather than an immediate change in trading rules. Until SEBI issues a final decision and implementation framework, the current regulatory arrangements will continue to apply.
The consultation highlights the regulator's effort to respond to market concerns after the rollout of the Closing Auction Session while maintaining its broader objective of improving transparency and efficiency in India's capital markets. The final outcome could have an important impact on how futures and options contracts are settled on expiry days and how market participants manage trading activity near the close.