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SEBI Reviews Derivatives Settlement Method After CAS Rollout
Developing
In Short: SEBI is set to revise the settlement price mechanism for derivatives contracts following concerns over the new Closing Auction Session (CAS).
The Securities and Exchange Board of India (SEBI) is reviewing the settlement methodology for derivatives contracts following issues that emerged during the first month of the new Closing Auction Session (CAS).
SEBI plans to issue a consultation paper to propose changes aimed at improving the accuracy and stability of derivative settlement prices, particularly addressing concerns over the settlement price used for derivatives on expiry days.
The regulator introduced the auction mechanism to improve closing-price discovery, replacing the Volume Weighted Average Price (VWAP)-based system for stocks in the derivatives segment.
SEBI has received significant feedback from market participants, and the consultation paper is expected to be issued in about a week, potentially reducing hedging risks and uncertainty in the derivatives market.
What's confirmed
What's still developing
- The latest announcement reflects that approach: rather than reversing the closing auction system, Sebi is focusing on the settlement methodology that appears to have created the most immediate concerns.
- Under the current framework, the closing price determined through CAS can influence the settlement value of derivatives, creating a direct link between activity during the closing auction and the final value of expiring contracts.
- “Such a measure may reduce hedging risks and stuff out some of the uncertainty but may not be enough by itself to normalise volumes to pre-CAS levels. People and algos will need more time to adapt and come up with newer strategies,” a derivatives analyst at a domestic broking firm said.
- Currently, trading in the CAS ends at 3:30 PM, while trading in the derivatives segment extends for 10 more minutes.
- Institutional investors — which include corporates, foreign investors, mutual funds, and proprietary traders with complex algorithms — together account for around 60-65% of the turnover in the derivatives market.
- Derivatives are financial instruments that allow traders to buy or sell an underlying security at a predetermined date and price in the future.
Sources
- Siliconindialink