- SEBI will review the Closing Auction Session framework after one year of implementation
- The revised CAS separates cash-market closing price from derivatives settlement price for one year
- CAS helps passive investors reduce tracking error with trades executed at a single price
The Securities and Exchange Board of India (SEBI) will review the Closing Auction Session (CAS) framework after one year, Chairman Tuhin Kanta Pandey said, reiterating the timeline the regulator had outlined earlier this month.
SEBI will allow the revised mechanism to operate before deciding whether further changes are needed. The regulator has retained CAS for the cash market but separated the cash-market closing price from the settlement price for expiring derivatives contracts for one year, following concerns raised during consultations with market participants.
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“We said that this will be reviewed after one year,” Pandey said during a discussion at NDTV Profit Ignite in Mumbai.
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The comments follow an October 16 report by NDTV Profit, which quoted SEBI Whole-Time Member KVR Murty as saying the regulator would wait at least a year before considering further changes to CAS.
Why SEBI Changed The Settlement Framework
Pandey said CAS was introduced to meet the needs of investors, particularly foreign passive funds, seeking execution at a specified price. Previously, investors relied on a volume-weighted average price (VWAP) derived from trades executed over a 30-minute period.
Executing trades at a single price helps passive investors reduce tracking error, Pandey said.
The cash-market mechanism has operated for about three months and is working as intended from a technological standpoint, he said. However, concerns emerged over using the closing auction price to settle derivatives contracts expiring on the same day.
Pandey said India's derivatives markets differ from those in other jurisdictions because trading continues until the final second. Introducing a period in which traders see indicative prices but no executed trades raised concerns about how market participants would respond, particularly given established trading strategies and algorithms.
Liquidity was another concern. Pandey said liquidity in a closing auction can take time to develop as more participants become familiar with the mechanism.
SEBI To Assess Market Feedback Before Further Changes
SEBI consulted market participants before deciding to retain CAS for cash-market trading while returning to the previous settlement method for expiring derivatives for one year, Pandey said.
The regulator had conducted two rounds of public consultation before finalising the revised framework, Murty said in the October 16 interview. SEBI received responses from around 20,000 participants, he said, adding that the regulator had considered their feedback.
Pandey's latest comments reaffirm that SEBI will assess how the framework operates before deciding on any further changes. The one-year review does not, by itself, mean the regulator will revise the rules when that period ends.
SEBI's revised CAS framework is scheduled to take effect on December 7. The changes cover reference-price calculations, permitted order types and trading cut-off times for index and stock derivatives.
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