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Sebi Proposes Two New Expiry Settlement Methods for Derivatives
India's market regulator, Sebi, has put forth new proposals for settling derivatives contracts, aiming to address volatility concerns arising from its recently introduced closing auction session (CAS). The suggested changes include a blended…
The Securities and Exchange Board of India (Sebi) has put forward a new framework for settling derivatives contracts. This move follows market feedback regarding the month-old closing auction session (CAS), which has been linked to increased price volatility and uncertainty in the market.
In a recent consultation paper, the regulator outlined two potential approaches for determining expiry-day settlement prices for index and stock derivatives. One option involves a blended Volume-Weighted Average Price (VWAP) calculation, incorporating trades from the final 30 minutes of continuous trading and the 10-minute CAS. Alternatively, Sebi suggested initially reverting to the existing VWAP method, based solely on trades during the last 30 minutes of continuous trading. This would precede a possible shift to the blended approach after at least a year of experience with CAS.
These proposals emerge just weeks after CAS went live for F&O stocks on August 3. Under the current CAS structure, closing prices are determined via auction instead of the VWAP of the last 30 minutes of continuous trading, while derivatives continue to trade around the closing process, particularly on expiry days. Sebi's review was prompted by concerns from market participants about the interaction between cash and derivatives markets during CAS, along with price movements in specific index option contracts.
The regulator's analysis showed that derivatives activity concentrates near the market close, with trading during the 10-minute CAS window contributing 4.13% of daily premium turnover on NSE and 6.79% on BSE during the study period. Sebi also proposed halting the dissemination of the indicative index value (IIV) during CAS, while continuing to provide indicative equilibrium prices (IEPs) for individual securities, citing the potential for IIV to be mistaken for an actual index level.
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