India’s markets regulator has proposed two options to determine settlement prices for index and stock derivatives, seeking to address sharp market swings linked to the new Closing Auction Session.
India’s markets regulator on Saturday proposed changes to the way settlement prices for index and stock derivatives are determined on expiry days, following sharp market swings after the introduction of a new Closing Auction Session (CAS).
The Securities and Exchange Board of India (SEBI) outlined the proposals in a consultation paper on changes to the CAS framework, which was introduced in the equity cash segment for stocks with derivatives contracts from August 3.
SEBI has proposed two alternatives for determining expiry-day settlement prices.
Under the first option, the settlement price would be calculated by blending trades executed during the final 30 minutes of normal trading with the 10-minute closing auction.
The second option would exclude the closing auction altogether and revert to using trades from only the final 30 minutes of normal trading for determining the settlement price, at least for one year.
The second approach would effectively delink derivatives settlement from the CAS during that period.
The regulator has also proposed several other changes to the closing auction mechanism. These include preventing the cancellation of limit orders placed more than 1 per cent above or below the reference price.
More from BusinessSEBI has proposed reducing the post-closing auction window for derivatives trading to five minutes from the existing 10 minutes. It has also proposed stopping the dissemination of indicative index closing levels during the closing auction.
However, indicative equilibrium prices for individual stocks would continue to be disseminated during the closing auction.
The regulator has invited public comments on the proposals until October 3.
“SEBI is not backing away from CAS. Instead, it is trying to refine CAS after observing expiry-day behaviour,” said Rajesh Palviya, senior vice president and head of research at Axis Securities.
“The key objective is to reduce the disconnect between cash-market price discovery and derivatives trading near the close,” Palviya said.
The proposed changes come after the new closing auction mechanism contributed to heightened volatility around derivatives expiry days, prompting market participants to closely assess its impact on price discovery and settlement.