Shares of several Indian capital market companies surged in early trading on Tuesday following a Reuters report suggesting that the Securities and Exchange Board of India (SEBI) may partially reverse its Closing Auction Session (CAS) mechanism for derivatives settlement. The anticipated change aims to address concerns over price volatility observed on expiry days since CAS was introduced in August.
Why SEBI is Reviewing the CAS Mechanism
The CAS mechanism, which involves a short auction at the end of the trading day to determine a stock's closing price, was implemented for key stocks and derivative contracts. While similar to practices in global markets such as the US and Hong Kong, its introduction led to notable fluctuations in derivatives prices, especially on expiry days. This prompted the regulator to review its efficacy.
Proposed Changes and Market Impact
According to sources with direct knowledge of the matter, SEBI is likely to halt the use of closing auctions for derivatives settlement prices for at least a year. Instead, derivatives settlement prices would be based on the volume-weighted average price (VWAP) of the final 30 minutes of regular trading. The closing auction, however, would continue to be used for underlying stocks in the less liquid cash market to determine their end-of-day prices.
The news immediately boosted investor confidence in capital market intermediaries. Key beneficiaries included:
- BSE Ltd: Surged nearly 3.55%
- Angel One Ltd: Jumped close to 3.5%
- Motilal Oswal Financial Services Ltd (MOFSL): Added more than 3.1%
- Billionbrains Garage Ventures Ltd (Groww's parent): Rose 2.25%
- National Stock Exchange of India Ltd (NSE Ltd): Gained over 2.11%
- Nuvama Wealth Management: Was up 1.85%
This proposed shift would align India's derivatives settlement closer to approaches seen in the US and Europe, where dedicated pricing mechanisms often involve volume-weighted average prices over set trading periods rather than a single closing auction.