Sebi may pause closing auction rule for derivatives after expiry-day swings
The Securities and Exchange Board of India (Sebi) is likely to partly reverse its recently introduced changes to the mechanism used to determine settlement prices for derivatives, following concerns over sharp price swings on expiry days, Reuters reported, citing two people familiar with the matter.
Under the proposed change, Sebi may stop using the Closing Auction Session (CAS) to calculate settlement prices for derivatives for at least a year. Instead, the volume-weighted average price (VWAP) of the final 30 minutes of trading could be used to determine derivative settlement prices, according to the report.
The move comes after the new closing auction mechanism triggered sharp swings in derivatives prices, particularly on expiry days.WHAT IS SEBI CHANGING?
Sebi introduced the Closing Auction Session last month for stocks that have futures and options contracts linked to them. Under the mechanism, a short auction at the end of the trading session is used to determine the closing price of a stock.
The mechanism was intended to change how closing prices are determined, but its impact on derivatives trading has led to concerns over volatility around expiry.
According to Reuters, Sebi received around 20,000 suggestions after seeking feedback on a consultation paper issued last month.
Under the likely changes, the closing auction would no longer be used to calculate derivatives settlement prices for at least one year. The final 30-minute VWAP would instead be used for this purpose.
However, the closing auction would continue to determine the end-of-day price for underlying stocks in the less-liquid cash market, the Reuters report said.WHY IS SEBI REVIEWING THE RULE?
The review follows sharp swings in derivatives prices on expiry days after the introduction of the new mechanism.
The closing auction is designed to determine a stock's end-of-day price through a short auction. But when that price is also used for settling derivatives contracts, movements during the closing period can have a larger impact on futures and options positions.
Sebi's latest consultation process has drawn around 20,000 suggestions, indicating significant market feedback on the changes.WHEN COULD THE NEW RULES COME?
Sebi is expected to implement the changes by the end of October, according to the Reuters report.
The regulator is likely to retain the closing auction for less-liquid stocks in the cash market, while changing the mechanism used specifically for derivatives settlement.
Sebi did not immediately respond to Reuters' request for comment.HOW WILL DERIVATIVE SETTLEMENT CHANGE?
Under the proposed approach, the settlement price for derivatives would be based on the volume-weighted average price during the last 30 minutes of trading rather than the price determined through the closing auction.
This would give the settlement calculation a broader trading window instead of relying on the outcome of a short end-of-day auction.
The proposed approach would also bring India's derivatives settlement process closer to practices in the US and Europe, where dedicated pricing mechanisms, including VWAP-based calculations over specified periods, are used for derivatives settlement.
The changes are yet to be formally announced by Sebi. - Ends
