The securities market regulator of India, the Securities and Exchange Board of India (Sebi), plans to publish a consultation paper within a week proposing changes to the methodology for calculating settlement prices for derivatives contracts. This decision follows feedback received regarding the recently introduced Closing Auction Session (CAS) mechanism.
This move came after significant dissatisfaction from traders and other market participants. They pointed to sharp price spikes and distortions observed during the 20-minute CAS window, which launched on August 3rd. Furthermore, participants noted discrepancies between the closing price achieved via CAS and the prices prevailing during regular trading hours. These distortions were more pronounced on expiry days.
Under the current mechanism, the closing price obtained through CAS serves as the basis for determining settlement prices for derivatives contracts on their expiration day. The regulator announced in a press release on Thursday that, having studied the experience of the initial CAS implementation period and stakeholder feedback, Sebi may propose certain adjustments to the methodology for calculating derivative contract settlement prices, which will be detailed in the consultation paper in about a week.
Sebi conducted several meetings with market participants, stockbrokers, foreign portfolio investors, mutual funds, and other stakeholders to gather feedback on the mechanism after its impact on the market during its first month of operation. Key issues raised included the determination of derivative settlement prices on the expiration date based on the price set through CAS.
Last month, the regulator also took action against two entities for alleged manipulative trading during the CAS period. In addition to penalties, these two entities were delisted from the stock market. Sebi emphasized that the CAS structure was introduced following 'extensive stakeholder consultations' and detailed policy discussions, including two rounds of public consultations between December 2025 and August 2025. The regulator noted that the data gathered during these consultations was thoroughly analyzed and taken into account when finalizing the structure.
The objective of CAS is to enhance pricing transparency and reduce tracking error. Previously, Sebi Chairman Tuhin Kanta Pandey noted that the mechanism helps in identifying manipulators. After implementation, market participants expressed concerns regarding low awareness and the system's readiness to handle CAS, causing confusion among traders in the initial weeks. Later, the regulator encouraged broader participation, and brokers began displaying indicative equilibrium prices in their systems.
Following the launch, trading volumes sharply decreased: turnover in derivatives instruments fell to a 14-month low in August. Moreover, August recorded the steepest drop in F&O turnover by 22 percent—the highest figure since December 2024. Some market participants hinted at a substantial decline in stockbroker revenues due to falling volumes and investor caution during the CAS period.