India’s markets regulator proposes revamp of derivatives expiry pricing

MUMBAI: India’s markets regulator proposed on Saturday a review of how settlement prices for index and stock derivatives are determined on expiry day.

The plans were unveiled in a consultation paper laying out changes to the newly launched Closing Auction Session (CAS) that has led to sharp market swings on derivatives expiry days.

The CAS framework was introduced in the equity cash segment for stocks on which derivatives contracts are available, with effect from August 3. The move aimed at efficient and transparent discovery of the closing price of securities.

Here are details: The Securities and Exchange Board of India (SEBI) has floated two options for expiry-day settlement price of index and stock derivatives.

The first option would blend trades from the last 30 minutes of normal trading with the 10-minute closing auction to yield the settlement price.

The second option would go back to using only the last 30 minutes of normal trading, leaving out the closing auction from the calculation altogether, at least for a year. The second option would effectively de-link derivatives settlement from CAS for at least a year.

The other proposals include barring cancellation of limit orders placed beyond 1percent above or below the reference price, reducing to five minutes from ten the post-closing auction window for derivatives trading, and not disseminating indicative index close levels during the closing auction.

The regulator has proposed to continue disseminating indicative equilibrium price for stocks during the closing auction. The regulator invited submission of public comments on the proposals by October 3.

“SEBI is not backing away from CAS. Instead, it is trying to refine CAS after observing expiry-day behaviour,” said Rajesh Palviya, senior vice president and head of research at Axis Securities. “The key objective is to reduce the disconnect between cash-market price discovery and derivatives trading near the close,” Palviya said.