SEBI Likely to Adopt Blended Pricing Framework to Curb Derivatives Expiry Day Volatility — October 15, 2026

The Securities and Exchange Board of India (SEBI) is poised to adopt a blended pricing framework to determine final settlement prices in the equity derivatives segment. The regulatory measure is aimed at curbing erratic price swings and closing distortions witnessed on weekly and monthly options expiry days.

The anticipated framework will combine the Volume Weighted Average Price (VWAP) of transactions executed during the last 30 minutes of the Continuous Trading Session (CTS) with the prices discovered during the 10-minute Closing Auction Session (CAS). By avoiding sole reliance on the closing auction, the market watchdog seeks to address thin liquidity conditions and sharp terminal volatility.

Friction Over the Closing Auction Mechanism

The overhaul follows significant friction in the market after SEBI introduced the Closing Auction Session in the equity cash segment on August 3. Under the existing rules, the closing price determined through CAS also served as the benchmark settlement price for expiring index and single-stock derivative contracts.

However, the mechanism led to unintended consequences on expiry sessions:

• Liquidity crunches: Thin order depth during the short 10-minute auction window amplified price swings in both cash counters and index constituents.
• Indicative price instability: Large shifts in indicative equilibrium prices (IEP) triggered hyperactivity and abrupt re-pricing across deep in-the-money and out-of-the-money option contracts.
• Settlement mismatch: Proprietary trading desks and domestic brokerages raised concerns over severe slippage, arguing that single-point auction matching distorted derivative payoffs.

The Blended VWAP Architecture

Following pushback, SEBI issued a consultation paper in September outlining potential solutions and seeking stakeholder feedback until October 3. While the regulator considered an interim option of temporarily reverting to the legacy 30-minute CTS VWAP mechanism, discussions indicate that SEBI is leaning toward adopting the blended VWAP approach directly.

Key mechanics of the blended pricing framework include:

• Volume-weighted contribution: For index derivatives, the contribution of trades executed during the final 30 minutes of CTS and the 10 minutes of CAS will be determined strictly by actual traded turnover across the respective windows, without assigning arbitrary pre-fixed weights.
• Cross-exchange stock settlement: For stock futures and options, blended settlement prices will be derived from cross-exchange VWAP data covering both continuous trading and auction windows.
• Binding auction orders: Alongside pricing methodology tweaks, regulations are being tightened to restrict order cancellations and curb spoofing near the auction cutoff.

Impact on Indian Market Participants

The transition to a blended settlement model directly addresses long-standing grievances among retail participants and institutional trading desks. Because derivative settlement will no longer rely solely on the closing auction's final clearing price, large orders placed during the auction will have a diluted impact on the broader settlement price of benchmark indices such as the Nifty 50 and BSE Sensex.

Market participants anticipate that the blended VWAP structure will neutralize abrupt expiry-day spikes, lower execution risks for systematic option sellers, and restore orderly settlement across India's high-turnover derivatives market.

Tags: SEBI NSE BSE Nifty 50 Sensex Indian Derivatives Market