The Securities and Exchange Board of India has proposed two possible changes to the way settlement prices for index and stock derivatives are determined on expiry days, following concerns over market volatility associated with the newly introduced Closing Auction Session.
SEBI has outlined the proposals in a consultation paper as it reviews the impact of the Closing Auction Session, or CAS, which was introduced in the equity cash market from August 3, 2026. The mechanism was introduced with the objective of improving transparency and efficiency in the discovery of closing prices for eligible stocks.
However, the introduction of CAS has been followed by increased volatility around derivatives expiry sessions. Market participants have raised concerns about differences between prices during the regular trading session and prices discovered during the closing auction. These concerns have prompted the regulator to consider changes to the way derivatives settlement prices are calculated.
Under the first option proposed by SEBI, the settlement price for derivatives on expiry day would be calculated using a blended Volume Weighted Average Price, commonly known as VWAP. The calculation would combine trades executed during the final 30 minutes of the Continuous Trading Session with trades executed during the 10 minute Closing Auction Session.
The proposed blended methodology would allow the closing auction to remain part of the settlement price calculation while reducing the influence of a relatively short auction period on the final price. The approach is intended to bring together price information from both the regular trading period and the closing auction.
The second option would continue with the existing Continuous Trading Session VWAP methodology. Under this approach, the settlement price would be based only on trades executed during the final 30 minutes of regular trading. The Closing Auction Session would therefore be excluded from the calculation of derivative settlement prices.
SEBI has proposed that this second approach could remain in place for one year. This would effectively separate derivative settlement prices from the CAS for the specified period and give the regulator and market participants more time to assess the performance of the auction mechanism.
The review comes after several instances of sharp price movements around the closing auction on derivatives expiry days. The CAS was introduced to improve the process of determining official closing prices, but lower liquidity and concentrated trading activity during the auction have raised concerns about price movements and their impact on derivative contracts.
In a recent example, Indian benchmark indices experienced notable volatility during the closing auction. Market participants have also pointed to the possibility of differences between the price movement during regular trading and the final price discovered through the auction. Such differences can have a significant impact on traders and investors holding positions in derivatives contracts that expire on the same day.
Apart from the two settlement price options, SEBI has proposed several other changes to the CAS framework. The regulator has suggested restrictions on the cancellation of limit orders placed more than 1 percent above or below the applicable reference price.
SEBI has also proposed reducing the post closing auction trading window for derivatives from 10 minutes to five minutes. Another proposal involves stopping the dissemination of indicative index closing levels during the closing auction. However, the regulator has proposed continuing to display the indicative equilibrium price for individual stocks during the auction.
These measures are aimed at improving the functioning of the closing process and reducing the possibility of excessive volatility or price distortions near the end of the trading session.
SEBI has clarified through the consultation process that it is reviewing and refining the CAS framework rather than abandoning the mechanism altogether. The regulator is seeking feedback on how the auction system can better support transparent price discovery while limiting the impact of short term market movements on derivatives settlement.
The final decision will depend on feedback received from market participants and other stakeholders. SEBI has invited public comments on the proposed changes until October 3, 2026.
Until a final decision is announced, traders and investors should treat the two settlement methodologies as proposals rather than new rules. Any change to the expiry settlement mechanism could have implications for derivatives traders, especially those using strategies that depend on the closing price of underlying stocks or indices.
The review highlights the regulator's effort to balance two objectives. One is to ensure that closing prices are determined through a transparent and efficient market mechanism. The other is to ensure that the closing process does not create unexpected price differences or excessive volatility for derivatives participants.
SEBI's proposed changes are therefore likely to remain a key development for India's equity derivatives market as regulators, exchanges and market participants assess the impact of the CAS framework and determine how expiry day settlement should be handled going forward.