SEBI Proposes Two New F&O Settlement Options Following Closing Auction Session Volatility — September 27, 2026

The Securities and Exchange Board of India (SEBI) has moved to overhaul the settlement price mechanism for futures and options (F&O) contracts following sharp expiry-day fluctuations caused by the newly introduced Closing Auction Session (CAS). The capital markets regulator has floated a consultation paper seeking public feedback until October 3 on two alternative calculation methodologies for expiring index and single-stock derivatives.

The review follows market feedback just weeks after the rollout of CAS in the equity cash segment on August 3. Under the initial framework, the closing price discovered during the 10-minute auction at the end of the trading session serves as the official closing price and the benchmark for determining final derivative settlement prices. However, market participants, brokers, and institutional investors raised red flags over severe volatility, pointing out that an illiquid and short cash auction window was dictating payoffs in the substantially larger derivatives market.

Two Options Under Consideration

SEBI has placed two alternative frameworks on the table to determine expiry settlement:

• Blended VWAP Methodology: The settlement price would combine all transactions executed during the final 30 minutes of the Continuous Trading Session (CTS) and the 10-minute CAS. The contribution of each trading period would be weighted strictly according to its actual traded value, without assigning a predetermined or arbitrary weight to either session. This expands the pricing sample to a 40-minute pool of actual executed trades.
• Interim Reversal to CTS VWAP: The regulator would temporarily revert to the previous framework, where expiring contracts are settled strictly using the volume-weighted average price (VWAP) across the final 30 minutes of continuous trading. Under this proposal, the arrangement would remain in place as an interim safeguard for at least one year, allowing cash market liquidity to mature and market participants to adapt before transitioning to a blended model.

Addressing Cash-Derivatives Divergence

The push for a revised formula comes after extreme price dislocations on recent expiry days. For instance, on a recent expiry session, sudden fluctuations during the auction window saw the BSE Sensex lurch between 76,510 and 74,373 within minutes, causing out-of-the-money put option premiums to spike by more than 300 per cent. Such gyrations triggered widespread losses for retail derivative writers and raised systemic hedging concerns.

Analysts at Kotak Institutional Equities noted that relying entirely on a short, 10-minute cash auction to settle vast F&O open interest created vulnerability to price manipulation and sharp spreads. The brokerage highlighted that widening the settlement pool across continuous trading would soften sudden auction spikes, though deep cash-market participation remains vital to make final price discovery robust.

Additional Safeguards Proposed

Alongside the settlement formula overhaul, the regulator is evaluating structural tweaks to the auction mechanism itself:

• Discontinuing the real-time dissemination of indicative index values derived from indicative equilibrium prices during CAS to stop traders from taking speculative derivative positions on transient figures. Individual stock indicative equilibrium prices will remain visible.
• Imposing restrictions on the cancellation of orders placed beyond a 1 per cent band from the reference price during the auction window.
• Amending the execution treatment of unexecuted Iceberg orders submitted during the auction session.

SEBI Chairman Tuhin Kanta Pandey affirmed that the regulator intends to eliminate expiry-day distortions while continuing to strengthen CAS as a key structural reform for Indian capital markets.

Tags: SEBI NSE BSE Nifty Sensex Derivatives Trading