{
  "type": "article",
  "title": "SEBI Proposes New Settlement Methodology for Derivatives Following Expiry Volatility",
  "summary": "Markets regulator SEBI has issued a consultation paper proposing two options to determine derivatives expiry settlement prices after the recently introduced Closing Auction Session caused extreme market fluctuations.",
  "content": "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.\n\nReview of Market Behavior Under the CAS Framework\nSEBI 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.\n\nThe 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.\n\nAuction Dynamics and Instances of Sharp Volatility\nUnder 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.\n\nTo 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.\n\nTwo Settlement Alternatives Under Consideration\nTo eliminate artificial price distortions on contract expiry days, SEBI has put forward two potential calculation models for index and stock derivatives\n\n• 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.\n• 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.\n\nUnder 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.\n\nBroader Scope of Market Structure Feedback\nBeyond 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.\n\nWhat this means for you\nThis proposal directly impacts stock and options traders across India by mitigating extreme risk and price spikes on contract expiry days.\n\n• For Traders Across India: Wild fluctuations in option premiums, which previously surged by several hundred percent during closing auctions, will be significantly reduced, protecting retail capital.\n• Investor Protection: A refined settlement price methodology prevents artificial price distortion between cash market closing prices and derivative contract final values.\n• Public Timeline: Market participants can submit their feedback until October 3, 2026, after which final regulatory guidelines will be implemented.\n• Trading Strategy Adjustments: If derivatives settlement is decoupled from CAS, traders can execute expiry-day strategies based on predictable 30-minute continuous trading averages.\n\nWhy this happened\nThis regulatory action was triggered by severe volatility in benchmark indices and options premiums following the introduction of the Closing Auction Session on August 3, 2026.\n\n• Primary Cause: Linking the final settlement of derivative contracts directly to the single equilibrium price discovered during a 10-minute auction created vulnerability to sharp price swings.\n• Extreme Volatility Episode: During one expiry session, the indicative closing level for the Sensex dropped by nearly 2.5% during the auction, causing put option premiums to spike several hundred percent within minutes.\n• Empirical Evidence: SEBI's comparative study of 26 expiries prior to CAS versus 5 expiries after its introduction confirmed that the framework needed urgent refinement.\n• Regulatory Objective: The regulator intends to preserve the benefits of cash market closing auctions while insulating derivatives settlement from temporary liquidity imbalances.\n\nQuestions & Answers\n\n1. Why has SEBI proposed changes to derivatives settlement prices?\nThe proposal was initiated after the newly introduced Closing Auction Session caused extreme volatility in index levels and multi-fold surges in option premiums on expiry days.\n\n2. What is the deadline for submitting public comments to SEBI?\nMarket participants and the public can submit their feedback on the consultation paper until October 3, 2026.\n\n3. Is SEBI planning to discontinue the Closing Auction Session (CAS)?\nNo, SEBI has explicitly stated that it is not scrapping CAS, but rather refining the settlement price methodology to reduce market friction.\n\n4. What are the two options proposed by SEBI for calculating settlement prices?\nOption 1 is a Blended VWAP incorporating the last 30 minutes of continuous trading and the 10-minute auction. Option 2 temporarily retains the 30-minute continuous trading VWAP, decoupling derivatives from CAS.",
  "url": "https://trendkia.com/en/money/vayada-bajara-men-eksapayari-vale-dina-achanaka-utara-charhava-para-lagama-kasane-ke-lie-sebi-ne-taiyara-kiya-naya-prastava-31517",
  "category": "Money",
  "publishedAt": "2026-09-12",
  "tags": [
    "SEBI",
    "Derivatives Settlement",
    "Nifty",
    "Sensex",
    "Closing Auction Session",
    "Stock Market",
    "Options Trading"
  ],
  "language": "en",
  "site": "TrendKia"
}