The Securities and Exchange Board of India (Sebi) has accelerated discussions with market participants following growing concerns over its new Closing Auction Session (CAS) system launched on August 3. According to CNBC TV18, SEBI Chairman Tuhin Kanta Pandey stated at a public event Wednesday that the regulator is open to tweaking the system and gathering inputs from market players for any potential review. The chairman had previously emphasized that "Any new mechanism, like the new process to determine closing prices of securities, needs time to settle and attract more participation." The new closing auction system, which covers more than 200 stocks with listed derivatives, was first proposed by SEBI in 2024 after index-tracking funds sought a closing auction to reduce tracking errors, replacing the previous system based on volume-weighted average prices in the last 30 minutes of trading.
Market participation in the CAS system has experienced a significant decline since its introduction, with average turnover in the auction window shrinking 40% compared with that in the last 15 minutes of trading under the previous regime, according to CNBC TV18. The mechanism, which lasts about 20 minutes from 3:15 pm to around 3:35 pm, had initially demonstrated remarkable improvement with participation rising from around 5-6% on the first day to approximately 20-25% currently. However, recent data shows that many proprietary trading firms and high-frequency traders, which provide liquidity in the last hours of the session, either stayed away from the auction or reduced activity in the initial days. The thin liquidity has caused larger moves in the equilibrium price than what investors were used to before the system was rolled out.
The new auction system has already impacted derivatives trading, with average traded volume of index options declining 27% to 268 million contracts on the Aug. 4 and Aug. 11 settlement days, down from the average across weekly expiries in July, according to Bloomberg data compiled by CNBC TV18. The uncertainty triggered by the new auction is affecting trading behavior across multiple segments. Some high-frequency trading firms flagged they couldn't borrow stocks for trading in India's developing securities-lending market, limiting their participation in the auction. Additionally, brokers including those who execute trades for foreign funds were particularly concerned over the new auction system's ability to handle trades later this month, when global passive funds rebalance their portfolios following MSCI Inc.'s quarterly changes.
Sebi has accelerated meetings with market makers, domestic mutual fund managers and stock brokers this week to collate feedback for any potential review of the mechanism, as reported by CNBC TV18. The regulator is examining measures to improve participation, liquidity and trading volumes in commodity derivatives, with proposals to allow foreign portfolio investors (FPIs) to participate in exchange-traded commodity derivatives and greater participation from mutual funds. On the commodity front, Sebi is also making efforts to make it easier for institutional investors to operate in Indian markets, with the regulator looking at areas where procedural hurdles could be reduced, including registration, the block deal framework and netting. The regulator had previously approached the GST Council Secretariat over the taxation of physical commodity deliveries, noting that warehouses spread across different states can create a requirement for separate state-level SGST registrations.
The Securities and Exchange Board of India (Sebi) has proposed significant changes to debt securities maturity limits to help companies better manage their cash flows. According to the consultation paper released on Monday, the regulator aims to increase the maximum number of International Securities Identification Numbers (ISINs) that can mature annually from 14 to 17 for privately placed debt securities. The proposals are open for public comments until 31 August 2026 and are designed to alleviate liquidity challenges and refinancing stress faced by Non-Banking Financial Companies (NBFCs) and major corporations. The move follows representations from market participants seeking a review of existing ISIN limits, as current restrictions may affect funding requirements of NBFCs and increase refinancing risks. SEBI's stated objective is to allow issuers to better match their debt repayments with their underlying assets, enabling issuers to smoothly distribute debt redemptions across each month and achieve cash-flow matching with underlying monthly assets.
