SEBI to issue consultation paper on derivatives settlement price methodology on Saturday

Market regulator Securities and Exchange Board of India (SEBI) is set to review the methodology for determining settlement prices of derivative contracts, with the regulator likely to issue a consultation paper on the matter on Saturday, September 12, according to media reports.

The review comes after sharp swings in the headline indices on expiry days following the rollout of the Closing Auction Session (CAS) in August. SEBI is expected to propose changes to the existing methodology to address concerns over how settlement prices are determined under the new system.

SEBI had earlier said it was closely monitoring the functioning of CAS during its first month and had held discussions with a wide range of market participants, including stock exchanges, brokers, proprietary traders, software vendors, mutual funds, industry associations, and foreign portfolio investors.

The regulator also received feedback through social media and other media platforms. On Thursday, the regulator clarified that it had no intention of rolling back the new system.

SEBI Chairman Tuhin Kanta Pandey on Thursday said the regulator would retain CAS. Speaking on the sidelines of the Global Fintech Fest in Mumbai, Pandey said, "MSCI acknowledged that the (recent) rebalancing went well under CAS. CAS is here to stay. The methodology for determining the closing price under CAS for derivatives on expiry day is being reworked."

Pandey said the implementation of the mechanism had worked smoothly from a technical perspective, particularly during the recent MSCI rebalancing exercise. However, he acknowledged that a section of the market had been affected by the way the settlement price is currently determined.

What is Closing Auction Session?

Introduced by the market regulator, the new framework is aimed at making the price discovery process more transparent and robust and applies only to cash-market stocks with derivative contracts, while the existing volume-weighted average price (VWAP)-based methodology will continue for other stocks.

Prior to this, the closing price of stocks (including stocks in the derivative category) in the equity cash segment of the stock exchanges was determined on the basis of the VWAP of trades executed during the last 30 minutes of the Continuous Trading Session (CTS).

The auction-based mechanism brings India closer to global market practices, where closing prices are discovered through an auction that aggregates buy and sell interest into a single pool of liquidity.

Sebi has said the framework is expected to improve execution efficiency for large orders, support fair settlement of derivatives and indices, and enable passive funds to transact at closing prices with lower tracking error.

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