SEBI floats options to rework derivatives expiry settlement pricing
SEBI has proposed two options for determining expiry-day settlement prices of index and stock derivatives, and invited public comments by October 3.
India's markets regulator has proposed a review of how settlement prices for index and stock derivatives are determined on expiry day, floating a consultation paper that sets out changes to the newly introduced Closing Auction Session (CAS) framework.
The CAS mechanism was rolled out in the equity cash segment for stocks that have derivatives contracts, with effect from August 3, with the aim of making the discovery of a security's closing price more efficient and transparent. Since its launch, however, expiry days have seen sharp market swings.
To address this, the Securities and Exchange Board of India has placed two alternatives before the public.
Under the first option, the settlement price would be derived by combining trades from the final 30 minutes of normal trading with the 10-minute closing auction. The second option would revert to using only the last 30 minutes of normal trading and exclude the closing auction from the calculation for at least a year — in effect de-linking derivatives settlement from CAS for that period.
Several other changes have also been proposed. Limit orders placed more than 1% above or below the reference price would not be allowed to be cancelled. The post-closing auction window for derivatives trading would be shortened to five minutes from ten. Indicative index close levels would no longer be disseminated during the closing auction, though the indicative equilibrium price for individual stocks would continue to be published.
The regulator has invited public comments on the proposals until October 3.
Market participants read the proposals as a refinement rather than a reversal. Rajesh Palviya, senior vice president and head of research at Axis Securities, said the regulator was not backing away from CAS but was seeking to fine-tune it after observing expiry-day behaviour. The central objective, he said, is to narrow the disconnect between cash-market price discovery and derivatives trading near the close.