The Securities and Exchange Board of India (Sebi) has proposed changes to the settlement methodology for derivatives, market timings and certain operational aspects of the closing auction session (CAS), weeks after the new closing price mechanism came into effect.
Under the proposals, settlement prices for index and single-stock derivatives on expiry days could either continue to be based on the volume-weighted average price (VWAP) of trades in the last 30 minutes of continuous trading, or move to a blended methodology that takes into account trades during the last 30 minutes of continuous trading and 10 minutes of CAS.
Sebi has also proposed that exchanges stop disseminating the indicative index value (IIV) derived from indicative equilibrium prices (IEPs) during CAS, while continuing to provide security-level IEPs. The regulator said such index values may be misinterpreted as actual levels reached by the index.
On market timings, Sebi has put forward two alternatives. Under Option A, continuous trading in CAS stocks would continue until 3:30 pm, followed by the auction, with derivatives trading continuing until 3:45 pm. Under Option B, the existing 3:15 pm cut-off for continuous trading in CAS stocks would remain, while derivatives trading would end at 3:30 pm.
The regulator has also proposed reducing the transition period between continuous trading and CAS from five minutes to up to one minute and cutting the post-CAS derivatives trading window from 10 minutes to five minutes.
It has proposed restricting cancellation of orders placed more than 1 per cent away from the reference price, while allowing price-improving modifications. Unexecuted Iceberg orders at the start of CAS could also be converted into normal limit orders, with the entire pending quantity disclosed.
The proposals are part of a consultation paper issued on Saturday. Sebi has invited public comments by October 3.
CAS was introduced in the equity cash segment for stocks having derivatives contracts from August 3, 2026.
Before CAS, the closing price was determined using the VWAP of trades executed during the last 30 minutes of continuous trading. Under CAS, the closing price is determined through an equilibrium price discovery mechanism based on buy and sell orders accumulated in the auction book.
However, derivatives continue to trade while the underlying securities go through the closing price discovery process.
Sebi said this assumes particular significance on expiry days, when derivatives activity can be concentrated towards the close and participants may respond to evolving prices of the underlying securities during CAS.
The initial experience has shown that derivatives activity remains significant immediately before and around CAS.
Sebi also noted that participants were taking into account IEP information during CAS, particularly in the initial few minutes, while making decisions in derivatives contracts.
An IEP, however, is not an executed traded price. It is an evolving price based on orders in the auction book and can change as orders are added, modified or cancelled.
Against this backdrop, Sebi has proposed two settlement options.
Under Option 1, or Blended VWAP, the expiry-day settlement price for both index and stock derivatives would use trades executed during the last 30 minutes of continuous trading and the 10 minutes of CAS.
For index derivatives, the contribution of the two periods would be determined by their actual traded value, with no predetermined weight assigned to either period.
For stock derivatives, the blended price would similarly be determined using VWAP across exchanges, taking into account actual traded value during the last 30 minutes of continuous trading and 10 minutes of CAS.
Under Option 2, or CTS VWAP, the settlement price would initially continue to be based only on trades executed during the last 30 minutes of continuous trading, as was the case before CAS.
CAS transactions would not form part of the settlement calculation during this interim period.
Sebi said the CTS VWAP approach could be retained for at least one year before considering a transition to the blended methodology.
Such a transition would not be automatic and would depend on factors including liquidity and participation in CAS, participant familiarity with the mechanism and an assessment of its price-discovery characteristics under different market conditions.
Sebi has proposed continuing the dissemination of security-level IEPs but stopping the dissemination of an IEP-derived IIV for indices during CAS.
The regulator said an index itself does not participate in the auction. Its indicative value during CAS is derived from the evolving IEPs of its constituent securities.
The final index value is established only after the auction concludes and final prices of the constituent securities are determined.
Thus, if an index’s IIV moves from 50,000 to 48,500 during CAS, it does not mean the index actually traded or reached 48,500. Sebi said such movements may nevertheless be misconstrued by market participants as actual index levels.
The consultation paper notes that international closing auction mechanisms generally distinguish between indicative prices for securities participating in the auction and the calculation of index values.
The review cited by Sebi found that unexecuted indicative prices of constituent securities are generally not used for continuously recalculating the corresponding disseminated index value during a closing auction.
Sebi has proposed shortening the transition period between continuous trading and CAS from five minutes to up to one minute.
The regulator said this would reduce the transition period while retaining time for exchanges to complete operational processes required to start CAS.
Under Option A, continuous trading for all stocks would run until 3:30 pm. After a transition period of about one minute, CAS would run from 3:31 pm to 3:40 pm for CAS stocks. Derivatives trading would continue until 3:45 pm.
Under Option B, continuous trading for CAS stocks would continue until 3:15 pm, while non-CAS stocks would continue to trade until 3:30 pm. CAS would run from 3:15 pm to 3:25 pm, including a transition period of about one minute, and derivatives trading would end at 3:30 pm.
Under both options, the reference price used for determining the CAS price band would continue to be based on the VWAP of trades during the last 15 minutes of continuous trading.
Sebi has also proposed reducing the post-CAS derivatives window to five minutes.
The existing 10-minute window was intended, among other things, to allow funds to achieve end-of-day exposures and arbitrageurs to square off unmatched positions. For single-stock derivatives, it also provides an opportunity to manage physical delivery obligations.
Restrictions proposed on cancellations, Iceberg orders
The existing CAS price band of plus or minus 3 per cent would remain unchanged.
Instead of narrowing the band, Sebi has proposed a targeted restriction on cancellations.
Orders placed within 1 per cent of the reference price could continue to be cancelled. But orders placed at, or modified to, prices beyond 1 per cent and up to 3 per cent from the reference price would not be allowed to be cancelled during CAS.
They could, however, be modified to improve the price, subject to the overall 3 per cent band.
Sebi said the approach is intended to reduce the scope for withdrawal of trading interest materially away from the reference price while retaining the ability of participants to improve their orders as demand and supply conditions evolve.
The regulator has also proposed allowing unexecuted Iceberg orders to move from continuous trading into CAS.
The pending quantity would be converted into a normal limit order and the entire unexecuted quantity would be disclosed in the CAS order book.
Sebi said this would ensure that eligible trading interest outstanding at the end of continuous trading can participate in the closing auction and that the quantity available for execution is fully reflected in the auction order book.
The regulator has sought comments on all seven proposals by October 3, 2026.
