SEBI Likely To Revise Closing Auction Rules, Restore 30-Minute VWAP For Derivatives Settlement

The Securities and Exchange Board of India (SEBI) is considering revising its rules for settling derivatives contracts, according to Reuters. SEBI recently implemented a new closing auction session (CAS) for key stocks with derivative contracts linked to them, which determines the closing price of a stock through a short auction at the end of the trading day.

However, the new mechanism has led to significant fluctuations in derivatives prices on expiry days, prompting SEBI to review the framework. SEBI Chairman Tuhin Kanta Pandey has cautioned investors against getting swayed by finfluencers and promises of high returns. One major change under consideration is discontinuing the use of the closing auction for settling derivatives prices for at least a year, and instead employing the volume-weighted average price (VWAP) during the final 30 minutes of trading.

The VWAP would be used to determine settlement prices for less liquid stocks in the cash market. The proposed changes are expected to be implemented by the end of October. SEBI received around 20,000 suggestions after issuing a consultation paper last month on potential changes to the framework. This revised approach could align India's derivatives settlement mechanism more closely with practices in major global markets, where dedicated mechanisms like volume-weighted average prices over specified trading periods are commonly used for derivatives settlement, rather than relying solely on a single closing auction.