SEBI Committee Endorses 30-Minute VWAP for Derivative Settlements
The SEBI Secondary Market Advisory Committee has decided to maintain the current VWAP method for settlement prices, delaying changes linked to CAS.
The existing VWAP methodology for derivatives settlement will remain in place for at least a year.
Market trading hours for CAS stocks will be adjusted to improve transition to auction sessions.
Concerns regarding market orders and price manipulation during auctions are still under review.
The Securities and Exchange Board of India (SEBI) has received a recommendation from its Secondary Market Advisory Committee (SMAC) to continue using the volume-weighted average price (VWAP) method for determining the settlement price of derivatives on expiry days. This decision comes after a review of feedback from market participants and aims to maintain stability in the market by avoiding immediate shifts to a new blended formula that includes closing auction session (CAS) prices.
The committee's recommendation follows the introduction of CAS for stocks in the futures and options segment on August 3, which replaced the previous closing-price process with an auction-based system. This transition raised concerns among market participants regarding potential price volatility and the influence of auction-derived prices on derivatives settlements. The current VWAP method will be calculated based on trades executed between 3 PM and 3:30 PM, as outlined in SEBI's consultation paper dated September 12.
In addition to the VWAP decision, the committee has proposed a revised trading schedule for CAS stocks. Normal trading will now continue until 3:30 PM, followed by a one-minute transition period before the closing auction runs from 3:31 PM to 3:40 PM. Derivative trading will be allowed until 3:45 PM, providing a smoother transition between regular trading and the auction while aligning cash and derivatives market timings.
The committee also discussed the display of the indicative equilibrium price (IEP) during CAS, with plans to continue its dissemination. However, there are ongoing concerns about the potential confusion between the security-level IEP and the indicative index value, which could mislead traders. Furthermore, the treatment of market orders remains unresolved, as there are apprehensions about the risk of price manipulation during the auction process.
Looking ahead, the committee's recommendations are expected to be included in SEBI's upcoming circular regarding the CAS framework. This will address various operational concerns, including the handling of iceberg orders, which allow traders to place large orders while only revealing a portion of the total quantity. The regulatory body is also set to continue its examination of market orders to mitigate any risks associated with price manipulation in future auctions.
