SEBI to pause use of closing-auction prices for derivatives settlement after pushback, sources say
India’s market regulator is preparing to halt the use of closing-auction prices to settle derivatives contracts for at least a year, following turbulence and industry pushback since the mechanism was introduced in August, according to two people with direct knowledge of the matter. Instead, the Securities and Exchange Board of India (SEBI) is expected to adopt the volume-weighted average price (VWAP) of the last 30 minutes of trading to determine settlement prices for derivatives, the sources said.
Background: Closing auction session introduced in August
SEBI in August rolled out a new closing auction session (CAS) for stocks that have linked futures and options contracts. The mechanism, commonly used in markets such as the U.S. and Hong Kong, conducts a short auction at the end of the trading day to determine a stock’s closing price.
However, the shift triggered sharp swings in derivatives prices on expiry days, raising concerns among market participants and prompting the regulator to revisit aspects of the framework. SEBI said in a post on X over the weekend that it had received 20,000 suggestions in response to a consultation paper issued last month.
What will change
Under the revised approach, settlement prices for derivatives will be derived from the VWAP of trades executed during the final 30 minutes of the regular session, the sources said, asking not to be identified as they are not authorised to speak to the media. For underlying stocks in the less liquid segments of the cash market, a closing auction will still be used to determine the end-of-day price, they added.
SEBI is expected to implement the changes by the end of this month. A SEBI spokesperson did not respond to a request for comment.
The move would bring India’s settlement process closer to practices in U.S. and European markets, where derivatives settlement is often based on dedicated pricing mechanisms, including VWAPs measured over defined trading windows, rather than a single auction print.
Transparency and data during the CAS window
As part of its ongoing review, SEBI had proposed in September to stop publishing the indicative value of an index during the 10-minute CAS window and instead display only the indicative prices of individual stocks, on the grounds that the index value was still being formed.
Industry feedback largely pushed back on that idea, according to the sources, arguing that sophisticated trading desks could reconstruct the index value independently and that removing it would reduce transparency without meaningfully addressing concerns about potential manipulation. “The regulator agrees but will push for greater awareness among investors that the underlying index price is only determined at the end of the 10-minute window,” said the second source.
Trading schedule likely to be retained
Respondents to the consultation also favoured keeping the existing timetable broadly intact—regular cash-market trading until 3:30 p.m. and derivatives trading until 3:45 p.m.—saying the current structure aids price discovery and better aligns the derivatives close with the cash-market process. According to the sources, SEBI is inclined to preserve this schedule.
Why the rethink matters
The expected pause in using closing-auction prices for derivatives settlement marks a partial reversal of August’s reforms and is aimed at tempering volatility observed on expiry days without discarding the broader closing-auction framework for equity price formation—especially in less liquid counters. By moving to a 30-minute VWAP for settlement, the regulator is betting that averaging over a wider window will yield a more robust and less gameable benchmark for derivatives contracts while still allowing the CAS to serve its role in cash-market price discovery.
What’s next
SEBI intends to roll out the adjusted methodology by month-end, while continuing to refine the closing process and disclosure practices within the CAS window. The regulator’s public outreach will also seek to reinforce that index levels during the auction window are provisional until the auction concludes.
Taken together, the steps indicate SEBI’s attempt to balance transparency and market integrity with the need to minimise abrupt price dislocations at the daily and monthly close—particularly around derivatives expiries—after extensive feedback from market participants.
