Sebi Proposes Changes to Derivatives Settlement and Closing Auction Timings

Sebi’s Proposed Revisions to Derivatives Settlement and Auction Timings: A Step Towards Enhanced Market Efficiency

The Securities and Exchange Board of India (Sebi) is looking to refine the derivatives trading landscape with proposed changes aimed at improving settlement methodologies and auction timings.

Understanding the Proposed Settlement Methodologies

Sebi’s proposals introduce two distinct methodologies for determining settlement prices for index and single-stock derivatives on expiry days. The first option, termed the Blended VWAP, would incorporate trades from both the last 30 minutes of continuous trading and the subsequent 10 minutes of the closing auction session (CAS). This approach aims to create a more comprehensive view of market activity leading up to the settlement.

The second option, known as CTS VWAP, would maintain the traditional method of determining settlement prices solely based on trades executed in the last 30 minutes of continuous trading. This option allows for a more gradual transition to the blended methodology, which Sebi suggests could be evaluated after a year based on market conditions and participant feedback.

Adjustments to Auction Timings and Trading Windows

In addition to settlement methodologies, Sebi has proposed changes to the timing of the CAS and the derivatives trading window. Two alternatives have been put forward: one extending continuous trading until 3:30 PM, followed by a CAS from 3:31 PM to 3:40 PM, while derivatives trading would continue until 3:45 PM. The second option retains the existing 3:15 PM cut-off for continuous trading in CAS stocks, with derivatives trading concluding at 3:30 PM.

These adjustments aim to streamline the transition from continuous trading to CAS, reducing the transition period from five minutes to as little as one minute. This change is expected to enhance operational efficiency while ensuring that market participants have adequate time to react to price movements.

Addressing Order Management and Trading Dynamics

Sebi’s proposals also include measures to manage order cancellations and the handling of Iceberg orders during CAS. The regulator suggests that orders placed more than 1% away from the reference price should not be cancellable, although modifications to improve pricing would still be permitted. This aims to maintain trading interest close to the reference price while allowing for responsive adjustments based on market conditions.

Furthermore, unexecuted Iceberg orders at the end of continuous trading could be converted into normal limit orders, ensuring that pending quantities are fully represented in the CAS order book. This move is designed to enhance liquidity and ensure that all available trading interest can participate in the auction process.

Implications for Market Participants

The proposed changes are particularly relevant for traders and institutional investors who actively engage in derivatives trading. By refining the settlement methodologies and auction timings, Sebi aims to enhance price discovery and reduce the potential for market manipulation, especially during critical trading periods such as expiry days.

As Sebi seeks public comments on these proposals until October 3, 2026, market participants will need to assess how these changes could affect their trading strategies and operational processes. The feedback received will likely play a crucial role in shaping the final implementation of these measures.

Key Highlights

• Sebi proposes two settlement methodologies for derivatives: Blended VWAP and CTS VWAP.
• Changes to auction timings could streamline trading processes and enhance operational efficiency.
• Order cancellation restrictions aim to maintain trading interest near reference prices.
• Unexecuted Iceberg orders may be converted to limit orders to improve liquidity during CAS.
• Public comments on the proposals are invited until October 3, 2026.

Investor Note: The proposed changes by Sebi could significantly alter the dynamics of derivatives trading, particularly on expiry days. Investors should closely monitor the developments and consider how these adjustments may impact their trading strategies and risk management practices.