SEBI to Halt Closing Auctions for Derivatives Settlements
India's market regulator plans to temporarily suspend the use of closing auctions for derivatives pricing following extensive feedback.
SEBI will stop using closing auctions for derivatives pricing for at least a year.
Feedback from 20,000 suggestions prompted the review of the new CAS mechanism.
Volume-weighted average prices will be used instead for determining derivative pricing.
The Securities and Exchange Board of India (SEBI) is set to suspend the use of closing auctions for calculating derivatives settlement prices for a minimum of one year. This decision comes as a response to significant feedback received regarding the recently implemented closing auction session (CAS) mechanism, which was introduced in August to determine the closing prices of stocks linked to futures and options contracts.
The CAS system, designed to enhance price determination at the end of trading days, has faced criticism for causing volatility in derivatives prices, particularly on expiry days. In light of this, SEBI has decided to revert to using the volume-weighted average price from the last 30 minutes of trading to establish derivative pricing. This shift aims to align India’s practices more closely with those of established markets like the US and Europe, where similar pricing mechanisms are employed.
In a recent communication, SEBI indicated that it had received around 20,000 suggestions regarding the CAS rules, which prompted the review. While the closing auction will still be utilized for less liquid cash market stocks, the new approach is expected to provide a more stable pricing environment for derivatives. SEBI is anticipated to implement these changes by the end of this month.
The regulator had also considered modifying its reporting practices by ceasing the publication of indicative index values during the CAS window, focusing instead on individual stock prices. However, feedback suggested that this could reduce transparency, as sophisticated trading entities could independently reconstruct index values. SEBI acknowledged these concerns and emphasized the need for investor awareness regarding the timing of index price determination.
Looking ahead, SEBI aims to maintain the current trading schedule, with regular trading concluding at 3:30 p.m. and derivatives trading extending until 3:45 p.m. This structure is believed to facilitate better price discovery and synchronization with the cash market's closing process, ensuring a smoother transition for traders and investors alike.
