India's market regulator, Sebi, is poised to revise the methodology for determining derivative contract settlement prices, responding to widespread market feedback and concerns over 'sharp price spikes and distortions' since the implementation of the Closing Auction Session mechanism.
Key Points
- Sebi will issue a consultation paper to propose changes to the methodology for determining derivative contract settlement prices, responding to market feedback on the Closing Auction Session (CAS).
- The CAS mechanism, implemented from August 3, led to 'sharp price spikes and distortions', particularly on expiry days, and significant divergences between BSE Sensex and NSE Nifty.
- Exchanges have already modified CAS norms, allowing the Volume Weighted Average Price (VWAP) of trades between 3:00-3:15 pm to determine the reference price for stock and index futures.
- Market participants raised concerns about low awareness and system preparedness for CAS, leading to reduced trading volumes and a 14-month low in derivative turnover in August.
- Sebi maintains that CAS was introduced after 'extensive stakeholder consultations' to bring transparency and reduce tracking errors, and has taken action against entities for alleged manipulative trading during the window.
The Securities and Exchange Board of India (Sebi) is set to issue a consultation paper in a week proposing changes to the methodology used for determining settlement prices of derivative contracts, following feedback on the recently rolled-out closing auction session (CAS) mechanism.
Separately, exchanges also modified certain norms in CAS, wherein the volume weighted average price (VWAP) of trades executed between 3-3:15 pm could be used to determine the reference price of stock and index futures.
Market Uproar Over CAS Implementation
The move comes after major uproar from traders and other market players who cited sharp price spikes and distortions during the 20-minute CAS window, implemented from August 3.
They also called out the difference between the closing price achieved through CAS and the trading prices prevailing during normal trading hours.
The said distortions were higher on expiry days.
Under the new mechanism, the closing price arrived at through CAS also forms the basis for settlement prices of derivative contracts on expiry.
Sharp divergences were noted between the BSE Sensex and the NSE Nifty on multiple occasions, since its implementation last month.
On Sensex expiry day last month, a divergence of 0.31 percentage points was seen between the two indices with the Nifty closing at 24,396, down 40 points or 0.16 per cent, while the Sensex closed at 78,080, up 114 points or 0.15 per cent.
"Having considered the experience of the initial period of CAS implementation and the feedback received from various stakeholders, Sebi may be proposing certain changes in the methodology for determination of settlement prices of derivative contracts for which a consultation paper will be issued in about a week," the regulator said in a press release on Thursday.
Sebi has met several market participants, stock brokers, foreign portfolio investors, mutual funds, and other stakeholders for feedback on the mechanism following the impact on the market during the first month of its operation.
"Among the issues raised, a significant area of feedback relates to the determination of settlement prices of derivative contracts on expiry based on the closing price determined through CAS," it added.
Exchanges Modify CAS Norms
Separately, in a circular issued on Thursday, exchanges said the reference price of stock and index futures will be determined on VWAP of the trades executed in the category during 3:00-3:15 pm. The CAS window starts from 3:15 pm.
"In case no trade is executed in the stock and index future during the period 3:00 pm to 3:15 pm, the last traded price of the stock and index future, respectively, during the day shall be taken as the reference price," the circular added.
Last month, the regulator also took action against two entities for allegedly manipulative trading during the CAS window.
Apart from penalising them, the two entities were also barred from the securities market. Sebi added that the CAS framework was introduced following "extensive stakeholder consultations" and detailed policy deliberations—including two rounds of public consultation between December 2025 and August 2025.
"The inputs received through these consultations were carefully examined and duly considered in finalising the framework," it noted.
Impact on Trading Volumes and Market Awareness
CAS is aimed to bring transparency in the pricing and reduce tracking error.
Earlier, Sebi chairman Tuhin Kanta Pandey had highlighted that the mechanism helps in catching manipulators.
Following the implementation, market participants had raised concerns on the low awareness and system preparedness around CAS—leaving traders confused in the initial weeks.
Later, the market regulator pushed for wider participation with brokers beginning to show indicative equilibrium prices on their systems.
Following the implementation, the trading volumes have come down sharply—with the derivative turnover falling to a 14-month low in August.
Further, August also recorded the sharpest fall of 22 per cent in F&O turnover—highest since December 2024.
Several players had hinted at a major dent in the revenues of stock brokers on the back of falling volumes and with investors turning cautious in the CAS window.
In January, Sebi had said that in major jurisdictions, closing price of stocks is determined based on CAS which provides a fair and transparent closing price and improves the efficiency of execution for large orders.
