Markets India

The Securities and Exchange Board of India (SEBI) has proposed reforms to the Closing Auction Session (CAS) framework, including two expiry-day settlement methodologies, revised market timings, and order-book transparency measures. Public comments are invited until October 3, 2026, as the regulator aims to enhance price discovery, reduce transition friction, and clarify distinctions between indicative prices and final settlement prices.

SEBI has outlined two options for determining expiry-day settlement prices for index and stock derivatives. Option 1, the "Blended VWAP," combines data from the last 30 minutes of continuous trading (CTS) and the 10-minute CAS, with relative contributions based on actual traded values. Option 2, the interim "CTS VWAP," relies solely on CTS data. SEBI plans to transition to Blended VWAP after a one-year evaluation period, contingent on CAS liquidity and market participant familiarity.

The regulator also proposed revised market timings, with Option A placing CAS after 3:30 pm (allowing a five-minute derivatives window) and Option B placing CAS after 3:15 pm (aligning derivatives close with 3:30 pm). A one-minute transition period between CTS and CAS was suggested to reduce operational friction. Post-CAS derivatives trading was cut from 10 to 5 minutes, reflecting feedback that shorter windows suffice once price discovery is complete.

Key changes include retaining the ±3% CAS price band while restricting cancellations of orders beyond ±1% of the reference price. Iceberg orders, which partially disclose trades during CTS, would transition to CAS as fully visible normal limit orders. For example, a 10,000-share Iceberg order with 6,000 executed during CTS would become a 4,000-share order in CAS, improving transparency. SEBI emphasized that Indicative Equilibrium Prices (IEPs) during CAS are evolving and do not reflect actual traded prices, clarifying that IEP-derived index values should not be interpreted as final levels.

The reforms aim to stabilize derivatives markets by limiting order withdrawal at extreme prices and ensuring fairer participation. By aligning CAS with CTS and refining settlement methodologies, SEBI seeks to improve liquidity and reduce misinterpretation of indicative data. Exchanges and brokers will need to adapt systems for Iceberg order handling and CAS price band restrictions, while traders must adjust to altered settlement rules and price discovery mechanisms.

SEBI has invited public comments on seven proposals by October 3, 2026. The feedback will determine the transition to Blended VWAP, with potential impacts on market liquidity and participant strategies. The regulator’s success in balancing flexibility and stability in derivatives trading will depend on the outcomes of this consultation.

SEBI’s proposed CAS reforms aim to refine expiry-day settlement, improve auction functionality, and clarify price discovery mechanisms. The outcome of public feedback will shape the transition to Blended VWAP, with unresolved questions about market liquidity adjustments and participant adaptation remaining key uncertainties.

Topics: Financial Regulation, Market Reform, Derivatives Trading, Auction Mechanism, Price Discovery, Securities Regulation, Trading Timings, Market Efficiency, Financial Markets, CAS, SEBI

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Source: ET Markets