The Securities and Exchange Board of India (Sebi) is set to review how settlement prices for derivative contracts are determined after industry feedback on the impact of the new closing auction session (CAS) on expiry-day pricing.
According to a statement issued by the regulator on Thursday, it may propose changes to the methodology for determining settlement prices of derivative contracts, with a consultation paper expected to be issued in about a week.
The move comes a month after CAS was introduced in the equity cash segment on 3 August. Under the framework, the closing price is established by matching the maximum number of buy and sell orders in the last fifteen minutes of a trading day. The closing price arrived at through the auction session is also used as the basis for determining settlement prices for derivative contracts on expiry.
The statement comes amid industry pushback that the auction sessions were causing unpredictable price swings and market uncertainty. For instance, on Thursday, which is BSE expiry day, the bourse plunged about 2,100 points in the first five minutes of the auction session, only to recover soon after. The index ultimately closed 417 points lower at 76,152.86.
The market regulator said it had monitored the functioning of CAS closely during its first month and held discussions with a range of market participants, including stock exchanges, brokers, proprietary traders, software vendors, mutual funds, industry associations and foreign portfolio investors. Feedback was also received through social media and other media platforms.
Area of concern
The issue of derivative settlement prices based on the CAS-determined closing price emerged as a significant area of concern in this feedback, Sebi said, without specifying the nature of the proposed changes.
The review marks an early reassessment of a key element of the CAS framework, which was introduced after extensive consultations with the market. Sebi had conducted two rounds of public consultation before finalizing the framework
Sebi is expected to seek market views through the proposed consultation before finalizing any changes.
