SEBI to Review Derivatives Settlement Rules via Consultation Paper Following Closing Auction Session Volatility — September 12, 2026

The Securities and Exchange Board of India (SEBI) is set to issue a comprehensive consultation paper proposing changes to the methodology used for calculating the settlement prices of futures and options (F&O) contracts on expiry days. The regulatory review comes barely a month after the capital markets watchdog implemented the Closing Auction Session (CAS) mechanism in the equity cash segment on August 3, 2026.

While SEBI Chairman Tuhin Kanta Pandey has firmly stated that the auction framework itself "is here to stay," the regulator has acknowledged severe industry friction surrounding derivatives settlement. Traders, proprietary trading desks, and domestic brokerage houses have voiced alarm over sharp price distortions, severe liquidity crunches during the auction window, and sudden spikes in option premiums during index expiry sessions.

Teething Troubles in Closing Auction Sessions

Under the framework rolled out in August 2026, SEBI replaced the legacy Volume Weighted Average Price (VWAP) calculation—which averaged trades during the final 30 minutes of continuous trading (3:00 PM to 3:30 PM)—with a multilateral call auction session for securities with active derivative contracts. Continuous trading for eligible cash stocks halts at 3:15 PM, giving way to an order-collection and price-matching auction between 3:20 PM and 3:30 PM, while derivatives trading extends up to 3:40 PM.

The closing price discovered through CAS was also mandated as the final benchmark to settle expiring derivative contracts. However, this linkage triggered unexpected market turbulence:

Key Expiry-Day Disruptions Flagged by Participants:

• Elevated Expiry Volatility: A concentrated order-matching window led to exaggerated index swings. In early September, benchmark indices witnessed dramatic swings of over 1,000 points on expiry days during the auction period, distorting settlement values.
• Option Premium Spikes: Out-of-the-money options frequently swung deep into-the-money within minutes due to sudden imbalances in closing auction prints, inflicting large losses on hedgers and retail option sellers.
• Liquidity Evaporation: Because market participants preferred squaring off intraday positions before the continuous market close at 3:05 PM or 3:15 PM, participation during the actual CAS auction window remained thin.
• Cash-Derivatives Mismatch: The timing misalignment between cash auction completion and derivatives market close left arbitrageurs and hedgers exposed to unhedged basis risk.

Regulatory Stance and Global Comparisons

Addressing market concerns, SEBI Chairman Tuhin Kanta Pandey emphasized that global stock markets, including the US, Japan, and Hong Kong, experienced similar liquidity adjustments during the early stages of adopting closing auctions. He noted that institutional rebalancing exercises, such as the recent MSCI index rebalancing, executed smoothly under CAS without technical glitches.

Nonetheless, SEBI conceded that derivatives settlement requires distinct treatment. The regulator stated that extensive feedback had been gathered from stock exchanges, mutual funds, foreign portfolio investors (FPIs), broker associations, and algorithmic trading software vendors.

Potential Proposals on the Table

Market participants anticipate that SEBI’s consultation paper will present several alternative mechanisms to insulate derivatives settlement from temporary auction imbalances:

• Decoupling F&O Settlement from CAS: Allowing derivatives contracts on expiry days to settle on a half-hour VWAP basis while retaining CAS purely for cash-market closing prices.
• Hybrid Benchmark Formulations: Creating a blended reference rate combining both VWAP and the CAS equilibrium price to mute single-price shocks.
• Tighter Auction Price Bands: Restricting reference price limits and expanding the depth of order aggregation before matching orders.
• Session Alignment: Adjusting market timing so that equity cash closing sessions and derivatives trading cease simultaneously, restoring the ability to execute effective cash-futures arbitrage.

Both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have already made interim technical adjustments, including using the 3:00 PM to 3:15 PM VWAP window to set baseline reference prices for stock and index futures. SEBI's forthcoming consultation paper will open these structural fixes to formal public comment before finalizing binding regulations.

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