SEBI has decided to change the settlement method for expiring derivatives contracts from December 7, following concerns over volatility after the introduction of a new closing auction framework.
Under the revised rules, settlement of expiring stock derivatives will return to the volume-weighted average price (VWAP) of the underlying stock during the final 30 minutes of continuous trading. For index derivatives, the settlement value will be calculated using the VWAPs of constituent stocks over the same period.
The move follows the Securities and Exchange Board of India’s October 15 review of the Closing Auction Session (CAS), which was introduced on August 3, 2026, to improve closing-price discovery in the cash market.
Pranshu Chugh, Managing Partner and Fund Manager at Inquant Systematic Investment Managers LLP, told NDTV that the review reflected a pragmatic approach to regulation. He said the objective of improving closing-price discovery was sound, but its implementation needed to account for the realities of India’s markets.
Why SEBI Changed The Rules
The closing auction was designed to bring buy and sell orders together to determine a transparent closing price. However, linking the auction price directly to derivatives settlement created challenges.
The auction initially attracted a narrower pool of orders than India’s large and liquid derivatives market. This raised concerns that prices discovered on relatively thin volumes could have an outsized impact on traders, particularly on expiry days.
The auction operated between 3:15 pm and 3:35 pm for futures and options (F&O) stocks, with a price band of plus or minus 3 per cent.
On August 27, the Sensex’s indicative value swung by more than 2,000 points during the auction, highlighting concerns over sharp price movements and their potential impact on derivatives positions.
Chugh said SEBI’s latest decision addresses these concerns without abandoning the broader reform. Separating cash-market closing-price discovery from derivatives settlement reduces the risk of derivatives positions being heavily influenced by prices discovered during a short auction window.
What Changes From December 7?
Under the revised framework, the Closing Auction Session will run from 3:30 pm to 3:40 pm. The cash-market closing price will continue to be determined through the auction.
However, expiring stock derivatives will use the underlying stock’s VWAP over the final 30 minutes of continuous trading for settlement. Index derivatives will use the VWAPs of their constituent stocks over the same period.
Expiring index contracts will also stop trading at 3:30 pm, when the auction begins.
Chugh said SEBI deserved credit for consulting market participants, reviewing the evidence and responding within about ten weeks of the framework’s launch.
For traders, the change means expiring derivatives will once again be settled using prices based on continuous trading rather than relying on the closing auction price.
