SEBI to Revise Derivatives Expiry Settlement Methodology Following CAS Liquidity Concerns — September 10, 2026

The Securities and Exchange Board of India (SEBI) is reworking the methodology used to determine the closing settlement prices of derivative contracts on expiry days. The decision follows widespread feedback from brokers, institutional investors, and proprietary trading desks regarding elevated volatility and liquidity bottlenecks triggered by the newly rolled-out Closing Auction Session (CAS).

Speaking on the sidelines of the Global Fintech Fest, SEBI Chairman Tuhin Kanta Pandey stated that the regulator is reviewing the derivative expiry pricing formula and will soon release a formal consultation paper proposing targeted adjustments. Pandey clarified, however, that the CAS mechanism itself is permanent and will not be discontinued.

The Transition from VWAP to CAS

Effective August 3, 2026, SEBI implemented the Closing Auction Session for stocks trading in the Futures and Options (F&O) segment. Under the earlier regime, a security's closing price was calculated using the Volume-Weighted Average Price (VWAP) across the final 30 minutes of continuous trading between 3:00 PM and 3:30 PM.

Under the CAS mechanism: * Normal continuous trading in F&O stocks concludes at 3:15 PM. * An order collection and matching auction runs between 3:15 PM and 3:35 PM to discover a single equilibrium price where buy and sell volumes maximize. * That single discovered price becomes the official daily close, which in turn serves as the final settlement price for expiring index and stock derivative contracts.

Market Friction and Liquidity Challenges

Since its implementation, market participants have raised concerns over sharp end-of-day price divergences, wide bid-ask spreads, and unexpected swings on contract expiration days. In August, equity derivatives turnover slipped by 22%—falling to a 14-month low—as traders turned cautious during the 3:15 PM to 3:35 PM window. On select expiry days, divergences between benchmark indices expanded significantly, creating severe settlement slippage for hedgers and options writers.

Addressing these liquidity concerns, Pandey noted that lower trading activity is standard during the early adoption phases of closing auctions globally.

"Initial liquidity was an issue after implementation. However, liquidity builds up over time," Pandey said, pointing out that jurisdictions such as the United States, Japan, and Hong Kong encountered similar liquidity curves when launching auction closes.

Pandey also noted that global index provider MSCI confirmed its late-August index rebalancing went smoothly through the CAS framework. During that rebalance, turnover inside the NSE closing auction rose to ₹39,718 crore, accounting for nearly 22% of total cash-market turnover for the day.

Potential Structural Changes

The forthcoming SEBI consultation paper is expected to explore potential mechanisms to decouple or insulate derivatives expiries from auction imbalances. Market participants have recommended several structural options: * Calculating derivatives expiry settlements using a broader VWAP period rather than tying them directly to the single CAS equilibrium price. * Aligning the closing timings between the continuous cash market, the closing auction session, and the derivatives market to prevent unhedged execution risk. * Tightening circuit bands and price collars during the 15-minute order entry window to curb intentional quote manipulation.

SEBI has maintained active discussions with exchanges, mutual funds, foreign portfolio investors, and retail brokerages to finalize these operational safeguards and ensure orderly settlement.

Tags: SEBI NSE BSE Nifty 50 BSE Sensex Derivatives