The Securities and Exchange Board of India (SEBI) has put forth proposals aimed at refining the settlement methodology for derivatives contracts, amending market timings, and addressing operational aspects of the Closing Auction Session (CAS). These changes are in response to feedback from market participants who have raised concerns regarding the existing framework since the implementation of CAS.
Proposed Settlement Methodology Changes
In a recent consultation paper, SEBI has introduced two options for determining the settlement price of derivatives on expiry days. The first option involves a “Blended VWAP” methodology, which combines trades executed during the last 30 minutes of Continuous Trading Session (CTS) and the subsequent 10-minute CAS period. This hybrid approach takes into account actual traded values, providing a more nuanced and representative method to calculate the settlement price.
On the other hand, Option 2 suggests maintaining the current CTS VWAP methodology as a temporary measure, relying exclusively on trades from the last 30 minutes of CTS. This option would allow for the adoption of the blended methodology only after a year of observing sufficient liquidity and market participation.
Changes to Market Timings
Alongside the proposed changes to the settlement methodology, SEBI is also considering adjustments to market timings. Two alternative proposals have been laid out: Option A would keep the CTS for CAS stocks operational until 3:30 PM, transitioning to CAS from 3:31 PM to 3:40 PM with derivatives trading available until 3:45 PM. Alternatively, Option B suggests wrapping up CTS by 3:15 PM, followed by CAS from 3:15 PM to 3:25 PM and derivatives trading until 3:30 PM.
In both options, SEBI aims to shorten the transition window between CTS and CAS, bringing it down from five minutes to as little as one minute. Additionally, the post-CAS derivatives trading window could be reduced from ten minutes to five, reflecting stakeholder feedback indicating that a shorter duration would suffice.
Operational Adjustments and Stakeholder Feedback
SEBI’s consultation also proposes modifications surrounding order placements during CAS. The authority is considering limiting the cancellation of limit orders beyond ±1 percent of the reference price, while still permitting price-improving changes within a ±3 percent band.
Moreover, a proposal seeks to convert unexecuted Iceberg orders at the end of CTS into regular limit orders, fully disclosing the pending quantity in the CAS order book. These initiatives are designed to enhance the price discovery process and improve clarity for market participants, ultimately fostering a more orderly interaction between cash and derivatives markets.
What This Means
The implications of SEBI’s proposed changes could significantly reshape trading dynamics on the Indian stock exchanges. By refining the settlement price calculation methodology, SEBI aims to create a more transparent and equitable trading environment, which could enhance investor confidence. Reducing the transition time between trading sessions not only simplifies trading practices but may also improve market efficiency. The proposed alterations indicate SEBI’s proactive approach in addressing the evolving landscape of derivative trading and responding to stakeholder concerns, thereby contributing to a more stable financial ecosystem.
Frequently Asked Questions
What is the Blended VWAP methodology proposed by SEBI?
The Blended VWAP methodology calculates the settlement price using trades executed during the last 30 minutes of Continuous Trading Session and the 10-minute Closing Auction Session, based on actual traded values.
How do the proposed changes affect trading hours?
SEBI has proposed two options for trading hours, one keeping CTS open until 3:30 PM followed by a 10-minute CAS, while another option suggests ending CTS earlier at 3:15 PM with a CAS from 3:15 PM to 3:25 PM.
What will happen to Iceberg orders under the new proposals?
SEBI has proposed that unexecuted Iceberg orders at the end of the Continuous Trading Session can be converted into normal limit orders, which would then be disclosed in the CAS order book.
By when can stakeholders provide feedback on these proposals?
Public comments on the proposals have been invited until October 3, 2026, through SEBI’s public-comment mechanism.
