The Securities and Exchange Board of India (SEBI) is set to review the methodology used to determine settlement prices for derivative contracts after concerns emerged over the impact of the newly introduced Closing Auction Session (CAS) on expiry-day trading.
The regulator said it may propose changes to the settlement-price framework after considering feedback from traders, brokers, institutional investors and other market participants. SEBI plans to issue a consultation paper within about a week, giving the market an opportunity to respond to the proposed changes.
The review comes only a month after CAS was introduced in India’s equity cash market on August 3, 2026. The mechanism was intended to improve price discovery at the end of the trading session, but its connection with derivatives settlement has generated significant concerns, particularly on expiry days.
What is the Closing Auction Session?
Before CAS was introduced, the closing price of eligible stocks was generally determined using the volume-weighted average price (VWAP) of trades during the final 30 minutes of continuous trading.
Under the new system, a dedicated auction is conducted from 3:15 pm to 3:35 pm to determine the closing price. The mechanism collects buy and sell orders and attempts to establish a price where the largest possible volume can be matched.
SEBI introduced the system after extensive consultations, with the broader objective of improving transparency, strengthening price discovery and reducing the potential for manipulation around closing prices.
However, one particular aspect has become controversial: the closing price discovered through CAS also became the basis for calculating the settlement price of derivative contracts at expiry.
That link is now at the centre of SEBI’s review.
Why derivatives traders raised concerns
Derivatives markets are particularly sensitive to changes in the underlying index or stock price near expiry because even a relatively small movement can produce a substantial change in option premiums.
Market participants reported sharp price movements during the CAS window after the mechanism went live. Concerns became particularly serious when the cash-market closing price diverged significantly from levels seen during normal trading.
On September 3, the issue became especially visible in the BSE Sensex. During the CAS, the indicative Sensex close briefly dropped by around 2.5%, triggering an extraordinary jump in some put-option premiums. Reuters reported that premiums on certain Sensex put options surged by around 400% to 500% within minutes. The Sensex eventually recovered and finished the day down 0.55% at 76,152.86.
Such movements can create significant problems for traders with positions expiring on the same day. A closing price that changes sharply during a relatively short auction period can materially alter the final settlement value of derivatives.
Cross-exchange differences add to the concerns
Another issue highlighted by market participants has been the difference between closing levels on India’s two major exchanges, the NSE and BSE.
Since the introduction of CAS, there have been instances when benchmark indices displayed noticeable divergences around the close. Business Standard reported that on one Sensex expiry day, the Sensex and Nifty showed a difference of around 0.31 percentage points in their respective daily moves.
For traders, these differences matter because derivative contracts are settled using specific underlying prices. When the closing mechanism produces an unusual movement that does not reflect the broader trading session, traders can face unexpected gains or losses.
The situation has also raised questions about liquidity during the auction period, particularly because participation can be thinner than during regular continuous trading.
Exchanges have already adjusted some rules
The controversy has already resulted in changes to certain reference-price rules.
Stock exchanges have modified the methodology for determining the reference price of stock and index futures. Under the revised approach, the VWAP of trades executed between 3:00 pm and 3:15 pm can be used to determine the reference price before the CAS begins.
If no trade occurs during that period, the last traded price of the stock or index future during the day is used instead.
The change is aimed at providing a more stable reference point for futures before the auction begins.
However, SEBI’s latest move goes further by examining the methodology used to determine the actual derivative settlement price at expiry.
SEBI is not necessarily abandoning CAS
Importantly, SEBI’s announcement does not mean that the regulator plans to scrap the Closing Auction Session.
The regulator has maintained that CAS was introduced after extensive consultation and policy deliberation. The objective remains to improve the quality of closing-price discovery and make the process more transparent.
Instead, SEBI appears to be examining whether the derivatives settlement mechanism should be separated or modified so that unusual movements during the cash-market auction do not create disproportionate consequences for expiring derivative contracts.
The consultation paper expected next week should provide more clarity on what changes the regulator is considering.
What the review could mean for traders
For options and futures traders, the review could become an important regulatory development.
If SEBI changes the way expiry settlement prices are calculated, trading strategies around expiry could also change. Traders may no longer need to hedge against the same type of last-minute CAS-driven price movement, depending on the final framework.
At the same time, SEBI will need to ensure that any new methodology continues to provide a reliable and transparent settlement price. A system that is too heavily influenced by normal-session prices could potentially fail to capture genuine price discovery occurring near the close, while an auction-based system with thin participation could create temporary distortions.
The regulator therefore faces a delicate balancing act between better price discovery and market stability.
Why SEBI’s decision matters for India’s derivatives market
India has one of the world’s most active derivatives markets, making the reliability of expiry settlement prices particularly important. Even short-lived movements in the underlying market can have large financial consequences when multiplied across leveraged futures and options positions.
SEBI’s decision to review the framework so soon after CAS was introduced signals that the regulator is taking the concerns raised by market participants seriously.
The upcoming consultation paper will be closely watched by stock exchanges, brokers, institutional investors and derivatives traders. The key question will be whether SEBI can preserve the benefits of the Closing Auction Session while preventing extreme expiry-day movements from producing disproportionate effects on derivative settlements.
For now, CAS remains in place, but its impact on derivatives settlement is clearly under regulatory review. The changes eventually proposed by SEBI could determine how India’s expiry-day trading landscape evolves in the months ahead.
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