India's Securities and Exchange Board of India (SEBI) is set to review the mechanism for determining settlement prices of derivative contracts, following market volatility and feedback from participants since the Closing Auction Session (CAS) was introduced on August 3, 2026. A consultation paper outlining proposed changes to the methodology is expected within a week. This move comes after a recent 2,000-point drop in the Sensex during a CAS, raising concerns about the impact of the current system on derivative settlements.
The CAS framework, designed to improve closing price discovery and align with global practices, determines the closing prices of securities in the equity cash segment, which are then used as the basis for derivative settlement prices. However, market participants have flagged concerns about increased volatility and susceptibility to last-minute order imbalances during the short auction window, directly affecting futures and options (F&O) expiry payouts. Average daily options turnover reportedly fell 20% in August, the first month of CAS implementation, according to Jefferies, with some algorithmic traders cutting activity by 35%-40%. Traders have reported significant losses, even with smaller positions and hedges, due to sharp price swings during the auction period.
While SEBI is reviewing the settlement price methodology for derivatives, the regulator has indicated that the CAS mechanism itself is not being rolled back. The review focuses on addressing operational issues and feedback received from various stakeholders, including stock exchanges, brokers, and foreign portfolio investors, who have communicated through multiple channels since CAS took effect. The proposed changes will be finalized after stakeholder evaluation of the upcoming consultation document. Separately, exchanges have stated that reference prices for stock and index futures will be determined by the volume weighted average price (VWAP) of trades executed between 3:00-3:15 pm.
