India markets regulator to partly reverse derivative settlement rules after pushback, sources say

MUMBAI: India’s markets regulator will partly reverse plans to overhaul the mechanism used to determine the closing prices of key stocks and derivative contracts linked to them, two sources with direct knowledge of the matter said.

The Securities and Exchange Board of India last month introduced a new mechanism called the closing auction session, or CAS, for stocks that have futures and options contracts linked to them.

Under this system, a short auction at the end of the trading day helps determine the closing price of a stock. The new process, similar to that used in global markets including the US and Hong Kong, has led to sharp swings in derivatives prices on expiry days, prompting the regulator to review it.

In a post on social media platform X over the weekend, SEBI said it had received 20,000 suggestions to tweak the rules in response to a consultation paper issued last month.

A key change SEBI is likely to make is to stop using the closing auction to calculate derivatives settlement prices for at least a year, the sources told Reuters.

Instead, the volume-weighted average price of the last 30 minutes of trading will be used to determine the derivative pricing, they said.

For underlying stocks in the less liquid cash market, a closing auction will still be used to determine the end-of-day price, said the sources, who declined to be identified as they are not authorised to speak to the media.

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 new approach would align India more closely with US and European markets, where derivatives settlement is often determined using dedicated pricing mechanisms, including volume-weighted average prices over set trading periods, rather than a single closing auction.