Sebi on Closing Auction Session after review: Latest update - New CAS rules | Top 5 things; what they mean for investors

Sebi on Closing Auction Session: Markets regulator Sebi on Saturday proposed a few changes to how settlement prices for index and single-stock derivatives are determined on expiry days, following a review of the newly introduced closing auction session (CAS).

The move comes after Sebi received several complaints from the market participants regarding the usage of the CAS closing price to settle derivative contracts on expiry.

"In view of the hyperactivity in expiring index options contracts along with IEP-based derivatives trading during CAS, it is proposed to review the existing methodology for determining the settlement price of both index and stock derivatives contracts on the expiry day," Sebi said in a consultation paper released on Saturday.

Here are the top 5 things Sebi has proposed:

1. How to determine settlement price:

Sebi has proposed two options for determining the settlement price.

• Under the first option, the regulator proposed introducing ‘Blended VWAP’ under which the settlement price would be based on trades made during the last 30 minutes of the Continuous Trading Session (CTS) and the 10-minute CAS. The weight assigned to each would be based on its actual trading volume during that period.
• The second option would be to continue with the existing CTS VWAP method, in which only trades executed during the last 30 minutes of CTS are considered.

2. CTS VWAP could continue for now

Sebi has proposed continuing with the existing CTS VWAP methodology for now to provide continuity and allow market participants more time to familiarise themselves with CAS.

Transition to blended VWAP at least a year later

The move towards blended VWAP should occur after at least one year, depending on adequate liquidity and participation in CAS, and on an assessment of how the auction is functioning across different market conditions.

3. IIV likely to be discontinued, IEP to continue

The regulator said it is likely to discontinue displaying the Indicative Index Value (IIV), as many market participants flagged movements in the IIV and certain index option contracts nearing expiry.

Meanwhile, it proposed continuing to provide the Indicative Equilibrium Price (IEP) for individual securities.

It clarified, “IEP is an indicative and evolving value based on orders available in the auction book and does not represent a price at which an actual transaction has taken place. The IIV, which is derived from the evolving IEPs of constituent securities, similarly should not be interpreted as the index actually trading at that level.”

4. CAS timings may be reviewed

The regulator has also sought feedback on the relative timing and duration of CTS, CAS, and derivatives trading, as well as certain operational aspects of the auction framework.

5. How can you submit suggestions

Stakeholders can submit comments and suggestions on the proposals until 3 October.

CAS was introduced in the equity cash segment for stocks with derivative contracts as of August 3, with the objective to facilitate efficient and transparent price discovery for closing prices.

Before CAS, closing prices were determined using the VWAP of trades executed during the last 30 minutes of CTS.

Under CAS, the closing price is determined through an equilibrium price discovery mechanism based on aggregate buy and sell orders in the auction.