- Closing auction session (CAS) is broadly on the right track but can be improved further, says Nilesh Shah.
- Mutual funds suggest changes to reduce arbitrage fund volatility in CAS pricing
- Industry requests more flexibility for mutual fund participation in CAS
The closing auction session (CAS) debate may have settled for now, but there is still scope for fine-tuning the mechanism, according to Nilesh Shah, Managing Director and Chief Executive Officer of Kotak Asset Management Company.
Shah said the introduction of CAS will undoubtedly have some impact on market volumes, partly because regulatory action against wrongdoers could drive out activity that was not healthy for the market. However, he believes the new mechanism is broadly on the right track and will help bring Indian markets closer to global standards.
“Closing auction has settled but can it be improved further? Answer is undoubtedly yes,” Shah said in an interview with NDTV Profit.
He stressed that the regulator will need to remain vigilant as there could always be an incentive for market participants to influence closing prices.
“I think water will settle down but regulator will have to remain vigilant so that no one takes the advantage,” he said.
Mutual Fund Industry Recommendations
Shah said that the mutual fund industry has already suggested changes that could make the closing auction more meaningful, particularly for passive funds and investors focused on minimising tracking errors.
One key suggestion relates to arbitrage funds. Shah said the current mechanism creates volatility in net asset values and spreads because futures prices are determined at 3:40 p.m., while cash prices are settled at 3:30 p.m. through the closing auction.
The industry has suggested calculating a theoretical futures price using the actual spread traded during a window between 2:45 p.m. and 3:15 p.m., or 3 p.m. and 3:15 p.m. This theoretical price could then be applied to the closing auction price, helping reduce uncertainty for arbitrage fund investors.
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The mutual fund industry has also sought greater flexibility for its participation in the closing auction. Shah said mutual funds are participating through both active and passive strategies, but some “leeway” is required to ensure their participation remains meaningful.
The second suggestion is about the greater flexibility for the participation of mutual fund in the closing auction. Shah said that the mutual funds have been participating through both active and passive strategies. However, some “leeway” is necessary to ensure that their participation remains meaningful.
Timing of CAS
On concerns regarding the timing and manner of CAS implementation, Shah said change is always difficult and regulators will inevitably face criticism when introducing new market mechanisms.
He argued that the timing was not necessarily a problem, describing the move as “better late than never” and saying the closing auction brings Indian markets closer to global practices.
“A change obviously has its own impact, but I think closing auction is now behind us and our markets will move forward,” Shah said, while emphasising that continued regulatory vigilance and industry feedback will be important.
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