SEBI Proposes New Formula For Derivatives Expiry-Day Settlement Prices

India's market regulator has opened a consultation on how derivatives contracts should be priced when they expire, after traders warned that a mechanism introduced barely six weeks ago has made expiry-day settlement less predictable. The Securities and Exchange Board of India floated two alternative formulas in a consultation paper released Saturday, inviting public feedback through October 3.

The Problem CAS Created

The trouble traces back to August 3, when SEBI rolled out the Closing Auction Session, a call-auction window meant to improve price discovery at the close of trading, similar to mechanisms already used on many global exchanges. Before CAS existed, the settlement price for expiring index and single-stock derivatives was simply the volume-weighted average price of the underlying stock during the last 30 minutes of continuous trading. Once CAS took over as the mechanism for determining official closing prices, derivatives settlement prices began reflecting auction-based closes instead. Market participants have since told the regulator that heavy, expiry-driven options activity built around indicative equilibrium prices during the ten-minute auction window has introduced fresh uncertainty for both buyers and sellers of options contracts nearing expiry.

Two Ways Forward

SEBI's first proposal, which it calls a "Blended VWAP" methodology, would calculate settlement prices using trades from both the last 30 minutes of continuous trading and the 10-minute auction, with each period's weight determined by how much value actually traded during it rather than a fixed ratio. The regulator argues this would let real market activity, rather than a predetermined formula, decide how much influence the auction has on any given day. The second option would, at least for now, ignore CAS entirely for settlement purposes and revert to the pre-August methodology based solely on the last half hour of continuous trading, giving the market more time to build liquidity and familiarity with the auction before folding it into settlement calculations. Under this path, SEBI has suggested waiting at least a year, and assessing how well the auction is functioning, before considering a shift to the blended approach.

Why It Matters For Traders

The distinction is not academic for anyone holding options or futures positions into expiry. A settlement formula that behaves unpredictably around the close can widen the gap between a contract's expected and actual payout, a risk that compounds given how much of India's derivatives trading volume is concentrated in the final minutes before expiry. SEBI has been candid that neither option is necessarily final, describing the continuous-trading-only approach explicitly as an interim arrangement rather than a permanent fix, with the eventual goal of incorporating both trading windows once CAS liquidity matures.

The Bigger Picture

The consultation lands at a moment when SEBI is pushing several structural changes through India's market plumbing at once, from the CAS rollout itself to a separate push around tokenising regulated financial assets under its so-called Demat 2.0 initiative. Readers tracking their own portfolios through market swings may also find it useful to check the latest Market Pulse issue for broader context on how regulatory shifts like this one are shaping trading conditions.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.