Explained: What Sebi’s proposed CAS changes mean for expiry-day trading and settlement

The Securities and Exchange Board of India (SEBI) is considering two approaches for settling derivatives prices on expiry days. The first methodology involves using a blended volume-weighted average price (VWAP) that takes into account trades from the last 30 minutes of continuous trading and the last 10 minutes of the closing auction session (CAS).

Alternatively, SEBI may revert to the previous VWAP-based methodology for at least a year. For market timings, there are two options: either continue continuous trading in CAS stocks until 3:30 pm followed by the auction, with derivatives trading concluding at 3:45 pm, or maintain the current 3:15 pm cut-off for continuous trading, with derivatives trading ending at 3:30 pm.

Both scenarios involve reducing the transition period between continuous trading and CAS from five minutes to one minute, and shortening the post-CAS derivatives window from 10 minutes to five minutes. SEBI has also proposed discontinuing the dissemination of an indicative index value during CAS to prevent misinterpretation of such values as actual traded values, while still providing indicative equilibrium prices for individual stocks.

Additionally, SEBI suggests restricting the cancellation of orders placed more than 1% away from the reference price, allowing only price-improving modifications. Unexecuted iceberg orders at the start of CAS could be converted into normal limit orders with complete disclosure. SEBI has accepted public comments on these proposals until October 3, following a month after the introduction of CAS on August 3, which transitioned from the VWAP method to an auction where buy and sell orders are matched to determine an equilibrium price.

However, since the introduction of CAS, sharp price spikes and increased volatility have been observed on expiry days due to reduced liquidity. SEBI's data indicates that derivatives activity remains robust around the closing period, with average premium turnover per minute in the 10-minute auction being ₹189.82 crore on the National Stock Exchange (NSE) and ₹288.94 crore on the Bombay Stock Exchange (BSE).

This compares to ₹126.31 crore and ₹141.48 crore, respectively, during the corresponding 30-minute period prior to CAS implementation. Comments must be in English, written as full sentences, and cannot be abusive or personal.