SEBI Confirms CAS Works Technologically but Pauses Use for Derivatives Expiry Settlement — October 28, 2026
Capital markets regulator Securities and Exchange Board of India (SEBI) has clarified its operational stance on the newly implemented Closing Auction Session (CAS), noting that while the mechanism is functioning soundly on a technological level in the cash market, tying it to same-day derivatives settlement introduced unforeseen market friction.
Speaking at the NDTV Profit Ignite summit in Mumbai, SEBI Chairman Tuhin Kanta Pandey detailed the underlying rationale behind recent policy adjustments, reiterating that CAS will continue for cash-market equities but remain delinked from expiry-day derivatives settlement for at least one year.
Why CAS Was Introduced
SEBI rolled out the CAS framework on August 3, 2026, primarily to accommodate institutional demand, particularly from passive foreign portfolio investors (FPIs) managing index-tracking funds and exchange-traded funds (ETFs). Passive funds require execution at a singular, clean closing reference price to minimize tracking error against benchmark indices like the Nifty 50 and BSE Sensex.
Historically, cash-market closing prices were determined using a 30-minute volume-weighted average price (VWAP) taken across trades between 3:00 PM and 3:30 PM. While effective, the VWAP approach often generated execution deviations for index funds executing large end-of-day rebalancing orders. The cash auction mechanism was introduced to pool liquidity and arrive at a single equilibrium price.
Algorithmic Concerns on Expiry Days
While the cash market adopted the auction mechanism without technical failures, integrating auction results into derivatives settlement created acute volatility on weekly and monthly expiry sessions.
Key challenges identified by the regulator included:
- Structural Divergence From Global Peers: In overseas markets, derivatives expiries often operate around structured windows, whereas Indian derivatives trade continuously down to the final second.
- Indicative Price Shocks: During the auction call phase, market participants observed fluctuating indicative prices without matching trades, confusing quantitative algorithms and automated risk engines.
- Hedging Disconnect for Option Writers: Option writers and arbitrageurs could not hedge sudden price shifts occurring between the end of continuous trading and the final auction-determined settlement price.
- Auction Liquidity Maturation: SEBI noted that auction order flow takes time to deepen, meaning thin liquidity during initial months caused wider spreads than anticipated on settlement dates.
Revised Settlement Framework From December 7
Responding to extensive feedback from around 20,000 market participants and domestic brokerages, SEBI issued a circular on October 15 modifying the market structure.
Under the revised roadmap effective December 7, 2026:
- The settlement price for expiring index and stock derivatives will return to the VWAP calculated during the final 30 minutes of the continuous trading session (3:00 PM to 3:30 PM).
- The Closing Auction Session will operate as a dedicated 10-minute window between 3:30 PM and 3:40 PM for cash equities.
- Contracts expiring on that day will cease trading at 3:30 PM, whereas non-expiring index contracts and stock derivatives will trade until 3:45 PM.
SEBI reaffirmed that it will monitor trading patterns and liquidity under this dual framework over the next 12 months before deciding whether to reintroduce a blended settlement model or retain the bifurcated structure permanently.
