The Securities and Exchange Board of India (SEBI) has released a consultation paper outlining potential modifications to how settlement prices for index and single-stock derivatives are calculated on expiry days. This regulatory intervention comes shortly after the implementation of the Closing Auction Session (CAS) framework led to heightened volatility in underlying indices and option premiums. Issued on September 12, the document proposes two primary options for calculating settlement prices while also inviting public feedback on CAS operating timings, derivatives trading hours, order routing practices, and market data dissemination. Stakeholders and market participants have been given until October 3, 2026, to submit their comments.
Review of Market Behavior Under the CAS Framework
SEBI conducted a detailed review of benchmark index options trading surrounding expiry sessions both before and after the introduction of CAS. The regulator explicitly clarified that it does not intend to scrap the auction system altogether. Instead, the initiative aims to refine the overall framework and address structural frictions between equity cash-market closing prices and derivatives settlement computations.
The Closing Auction Session was introduced by SEBI to establish a transparent equilibrium closing price for eligible cash-market equities. This mechanism officially took effect on August 3, 2026. Prior to its launch, the closing price for eligible securities was typically derived using the Volume-Weighted Average Price (VWAP) of all trades executed during the final 30 minutes of continuous trading.
Auction Dynamics and Instances of Sharp Volatility
Under the CAS protocol, buy and sell orders are aggregated in a discrete auction to discover a single market-clearing price. Because this auction-derived price was also adopted to settle expiring derivative contracts, any sudden price shifts during the auction directly impacted options pricing. SEBI had previously conducted consultations on the CAS architecture in December 2024 and August 2025 prior to rolling out the system.
To evaluate the impact, SEBI compared expiring benchmark index options premiums across 26 expiries between February and July 2026 (pre-CAS) against 5 expiries between August 3 and September 3, 2026 (post-CAS). The analysis revealed episodes where indicative close levels swung dramatically during the auction window. In one notable session, the indicative closing value for the Sensex dropped by approximately 2.5% within minutes, triggering a multi-fold surge of several hundred percent in certain put option premiums. Similar sharp spikes were recorded in Nifty put options on expiry day.
Two Settlement Alternatives Under Consideration
To eliminate artificial price distortions on contract expiry days, SEBI has put forward two potential calculation models for index and stock derivatives
- Blended VWAP Methodology: Under this approach, the final settlement price would be calculated by combining trades executed during the last 30 minutes of the Continuous Trading Session with trades completed during the 10-minute Closing Auction Session.
- Interim Decoupling: The second approach proposes retaining the traditional settlement methodology based solely on the final 30 minutes of continuous trading, thereby separating derivatives settlement from the CAS framework for an interim evaluation period.
Under the second framework, the regulator could maintain the separation for up to a year to gather more empirical operational data before potentially transitioning to a blended model.
Broader Scope of Market Structure Feedback
Beyond derivatives settlement, SEBI is seeking comprehensive feedback on the operational parameters of the equity market. The consultation paper invites suggestions regarding the timing of the closing auction, trading hours for the derivatives segment, specific order-handling procedures, and real-time dissemination of market information to ensure parity across all investor classes.
