The Securities and Exchange Board of India (SEBI) is looking to rework the way closing prices are determined for derivatives on expiry days under the newly introduced Closing Auction Session (CAS), while making it clear that the auction mechanism itself is here to stay.
SEBI Chairman Tuhin Kanta Pandey said the regulator is examining concerns raised by market participants and will propose solutions to address issues around the determination of expiry-day closing prices.
"CAS is here to stay," Pandey said, adding that SEBI will propose some solutions to address concerns related to the mechanism.
The CAS came into effect on August 3 as part of changes to the way closing prices are determined for stocks eligible for futures and options (F&O) trading. Under the new mechanism, continuous trading in F&O-eligible stocks ends at 3:15 pm. The stocks then enter a closing auction, during which buy and sell orders are matched. The resulting auction price becomes the official closing price.
Non-F&O stocks continue to trade normally until 3:30 pm, while stock and index derivatives trade until 3:40 pm. The changes were introduced to bring buy and sell orders together during the closing process and improve price discovery. However, the introduction of CAS has also raised questions among market participants, particularly around how the closing price on derivatives expiry days interacts with the settlement process.
SEBI in August said it is now assessing how traders and other market participants have responded to the new mechanism. Pandey said the regulator is engaging with market participants, analysing discussions on social media and reviewing suggestions received from the market before taking a final view.
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"We are talking to participants on the concerns. We are analysing the issues and will soon come with a view," he said.
The SEBI chief cautioned that it was too early to draw conclusions about the overall response to CAS. "It is too early to say response of participants on CAS," Pandey said.
The regulator plans to spend more time analysing the feedback before deciding what changes, if any, need to be introduced.
SEBI is also analysing data around expiry dates as part of its assessment of the new mechanism. Pandey said the regulator has not identified concerns relating to tracking errors under CAS. "Expiry date data is also being analysed closely," he said.
"There are no concerns around tracking errors in CAS," Pandey added.
The focus on expiry days is particularly important because derivatives settlement depends on the underlying reference prices, making the methodology used to determine closing prices a critical component of the market structure.
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