SEBI is set to reverse its controversial closing auction mechanism after sharp derivatives price swings on expiry days, according to reports from Reuters, ET Now, and The Hindu BusinessLine. The regulator will stop using the closing auction for derivatives settlement for at least a year, shifting to a 30-minute volume-weighted average price instead. Under the new system, underlying stocks in the less liquid cash market will still use the closing auction to determine end-of-day prices, as reported by The Economic Times, Reuters, and The Hindu BusinessLine. The revised process, similar to systems used in international markets such as the US and Hong Kong, triggered sharp volatility in derivatives pricing on expiry days, prompting regulatory authorities to re-evaluate the model. The regulator is expected to implement these changes by the end of this month, marking a significant policy reversal from the mechanism introduced last month.
The policy reversal comes after SEBI received over 20,000 responses on its Call Auction Session (CAS) reform consultation paper, as reported by NDTV Profit. The consultation paper put forth two distinct paths to resolve recent expiry-day volatility: Option 1 offers a blended approach that calculates the closing price using a mix of the CAS and the Volume-Weighted Average Price (VWAP), whereas Option 2 suggests putting the brakes and reverting to the 30-minute VWAP method for at least a year. Kamlesh Shroff, National President of the Association of National Exchanges Members of India (ANMI), told NDTV Profit that the massive volume of public feedback reflects a collective desire to ensure the transition is handled carefully, not outright opposition. "I would interpret that 20,000 people being, you know, not against CAS, but I would interpret [it] as 20,000 inputs for a market that wants to get this important reform right," Shroff said. The regulator had introduced a dedicated Closing Auction Session (CAS) mechanism for stock exchanges to improve price discovery for eligible stocks at market close, replacing the traditional Volume-Weighted Average Price (VWAP) calculation with a call-auction window at the end of the trading day.
Despite the regulatory uncertainty, an increase in trading volumes across exchanges indicates that participants are learning how to navigate the CAS mechanism, according to Venkatachalam Shunmugam, Partner at MCQube. The regulator is expected to implement these changes by the end of this month, marking a significant policy reversal from the mechanism introduced last month. The new approach would align India more closely with US and European markets, where derivatives settlement is often determined using dedicated pricing mechanisms, including volume-weighted average prices over set trading periods. Market expert Venkatachalam Shunmugam expects SEBI to retain blended CAS to preserve progress and avoid pulling traders away from learning the new system.
Market regulator SEBI is examining position limits for non-agricultural contracts to improve liquidity and depth without weakening risk controls, according to SEBI Chairman Tuhin Kanta Pandey speaking at the Commodity and Capital Market Participants Association of India's (CPAI) 12th International Convention in New Delhi. As reported by The Financial Express, The Hindu BusinessLine, Business Standard, and NDTV Profit, the regulator has completed consultations on the matter and guidelines will follow. Pandey emphasized that market design should allow contracts to gain scale, with some agricultural commodities experiencing physical settlement from the outset that can impede market development. The chairman suggested that a phased approach could allow contracts to mature before physical settlement becomes mandatory, addressing the current challenges in commodity market development.
On investor awareness, SEBI will strengthen efforts under Project Jagrook to spread awareness about commodity derivatives among farmers, farmer producer organisations (FPOs), MSMEs, hedgers and other market users, as reported by The Financial Express, The Hindu BusinessLine, Business Standard, and NDTV Profit. Pandey emphasized that 'access without understanding is not inclusion', stressing the need for participants to understand both the utility and risks associated with commodity derivatives. The regulator is also working towards deeper and more liquid cash markets with wider participation, stronger securities borrowing and lending, and efficient hedging and arbitrage expected to improve price discovery and strengthen the interaction between cash and derivatives markets.
Pandey emphasized that simpler regulation should not mean weaker compliance, with robust controls over client funds, margins, reporting and supervision remaining fundamental, according to The Financial Express. He added that 'trust and market integrity' must not be compromised in any regulatory changes. The regulator has widened FPI access to indices and physically settled non-agricultural contracts can add liquidity and strengthen price discovery, while position limits and delivery savings protect the physical market. SEBI's supervisory approach is becoming more risk-based, with routine inspections of compliant entities being reduced while greater attention is directed towards higher-risk entities and areas. The penalty framework for stock brokers has also been made more proportionate and predictable, with common compliance reporting reducing duplication for brokers and clearing members.
