The Securities and Exchange Board of India (SEBI) has released a consultation paper detailing two alternative methods for determining expiry-day settlement prices for index and single-stock derivatives. This initiative comes in response to numerous complaints regarding the closing auction session (CAS) and its impact on market volatility.
Introduced in August, the CAS mechanism was designed to facilitate efficient discovery of closing stock prices, replacing the previous volume-weighted average price (VWAP) system. However, market participants have reported issues such as large, sudden price swings, last-minute order imbalances, and liquidity challenges, particularly on derivative expiry days.
SEBI's Proposed Methodologies
SEBI's consultation paper outlines two distinct options:
- Blended VWAP Methodology: This option suggests calculating settlement prices using transactions executed during the last 30 minutes of continuous trading (CTS) combined with 10 minutes from the CAS. Transactions within the CAS would be excluded from settlement calculations during an interim period.
- Continuous Trading Only: The second option proposes determining expiry-day settlement prices solely from transactions executed during the last 30 minutes of continuous trading. SEBI notes this would give market participants time to adjust to the CAS while allowing liquidity to develop.
Expert Opinion Favors Simplicity
Trivesh D., COO of Tradejini, has weighed in on the proposals, expressing a preference for the second option. He believes that basing the settlement price on the VWAP of trades during the last 30 minutes of continuous trading—a methodology previously in practice—offers greater simplicity and is more established within the market.
"A blended VWAP based on both continuous trading and the CAS could add another layer of complexity to the settlement process. It would also make the final settlement price dependent on two different trading mechanisms and would require market participants to assess the relative impact of activity across both periods," Trivesh D. stated.
SEBI Chairman Tuhin Kanta Pandey affirmed earlier this week that the CAS mechanism is here to stay, citing acknowledgements from entities like MSCI regarding recent rebalancing under CAS. He also noted that initial liquidity issues are common with new systems and tend to improve over time.
Ensuring Market Transparency
Trivesh D. emphasized that the ultimate goal for any settlement methodology should be transparency, ease of understanding, and consistency for all market participants. The ongoing discussions aim to refine these processes to maintain market integrity and investor confidence amid evolving trading mechanisms.