SEBI reviews derivative settlement methodology following new closing auction

The Securities and Exchange Board of India (SEBI) is reviewing the methodology used to determine settlement prices for derivative contracts following the first month of the new Closing Auction Session (CAS). Introduced on August 3, the CAS replaced the previous volume-weighted average price mechanism with a 20-minute auction running from 3:15 pm to 3:35 pm to improve price discovery in the cash market.

While the auction itself remains in place, feedback from exchanges, brokers, and investors has highlighted concerns regarding how the CAS closing price impacts the settlement of expiring futures and options (F&O). SEBI indicated it would release a consultation paper within a week to address these settlement price determination issues. Although the regulator intends to keep the CAS framework intact, the specific formula used to link the cash market auction results to derivatives expiry is under scrutiny to manage volatility.