SEBI Proposes Updates to Consolidated Account Statements, Derivatives Settlement Methodology

SEBI Proposes Comprehensive Overhaul of Derivatives Settlement and Closing Auction Mechanisms

The Securities and Exchange Board of India (SEBI) is seeking stakeholder feedback on proposed changes to the Closing Auction Session (CAS) and derivatives settlement methodologies, aiming to enhance market efficiency and clarity.

Understanding the Closing Auction Session

Introduced in August 2026, the CAS was designed to improve the price discovery process in the equity cash segment for stocks with available derivatives contracts. Prior to this, the closing price was determined using the volume-weighted average price (VWAP) of trades executed in the last 30 minutes of the Continuous Trading Session (CTS). The CAS, however, employs an equilibrium price discovery mechanism that aggregates buy and sell orders during an auction, aiming to reflect a more accurate market consensus at the end of the trading day.

Feedback and Proposed Changes

SEBI’s proposal comes in response to feedback from various market participants, including stock exchanges and institutional investors, indicating the need for a review of CAS and derivatives settlement methodologies, especially on expiry days. The regulator is particularly concerned about the interaction between derivatives trading and the CAS price determination process, which can lead to significant trading activity in derivatives while the underlying securities are undergoing CAS.

The consultation paper seeks to clarify the roles of the Indicative Equilibrium Price (IEP), the final closing price, and the settlement price of derivatives contracts. SEBI is considering alternative methodologies for determining settlement prices, including a combination of CAS-derived prices and VWAP-based prices, as well as the VWAP of trades during the CTS.

Market Timing and Operational Considerations

Another focus of the review is the timing and duration of different market sessions. SEBI aims to address how the cash market price discovery interacts with derivatives trading, particularly around the close. The regulator noted that traded value during CAS might be lower than during comparable periods of CTS, necessitating a careful comparison of the two mechanisms.

The review is also expected to consider how market participants adapt their trading strategies as they become more familiar with the auction mechanism. SEBI has observed that derivatives activity remains significant immediately before and around CAS, indicating a need for a more integrated approach to trading and settlement processes.

Broader Implications for Market Participation

The proposed changes are part of SEBI’s broader strategy to enhance participation in the cash market, improve the availability of securities for borrowing and lending, and support hedging and arbitrage activities. By refining the CAS framework and derivatives settlement methodologies, SEBI aims to improve price discovery and liquidity in underlying securities.

Stakeholders are invited to submit their comments and suggestions on these proposals by October 3, 2026, through SEBI’s public consultation portal. This engagement is crucial as it allows market participants to voice their opinions and contribute to the evolution of India’s capital markets.

Key Highlights

• SEBI proposes a review of the Closing Auction Session (CAS) and derivatives settlement methodologies.
• The review aims to enhance market efficiency and clarity, especially on expiry days.
• Feedback from market participants has highlighted the need for operational adjustments.
• SEBI is considering alternative methodologies for determining settlement prices.
• Stakeholders can submit comments on the proposals until October 3, 2026.

Investor Note: The proposed changes by SEBI could significantly impact trading strategies and market dynamics, particularly for derivatives traders. Investors should stay informed about the developments and consider how these adjustments may affect their trading practices and overall market participation.