Sebi Proposes Changes to CAS Timings and Derivatives Pricing Mechanism

The Securities and Exchange Board of India (Sebi) has officially stepped in to address the growing market friction caused Introduced on August 3, the mechanism was intended to bring domestic price discovery closer to global standards; however, it inadvertently triggered significant volatility in stock prices and index valuations, drawing sharp criticism from institutional traders, retail investors, and brokerages. The regulator’s latest consultation paper serves as a formal acknowledgment of these systemic stresses, particularly regarding the pricing of derivatives contracts on expiration days, where the new closure mechanism led to anomalous price swings.

Sebi is now seeking to calibrate the system to ensure that the transition from continuous trading to the close does not compromise price integrity.

Mitigate Volatility Observed During Critical

To mitigate the volatility observed during the critical "settlement hour," Sebi has proposed two distinct frameworks for calculating derivatives settlement prices. The first proposal involves a weighted combination of the price discovered during the final 30 minutes of regular trading-the Continuous Trading Session Volume Weighted Average Price (CTS VWAP)—and the price finalized during the CAS.

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The second approach is more conservative, suggesting a reliance on the CTS VWAP while deferring the integration of CAS-derived prices into derivatives settlement for a period of one year.

Operational shifts are central to Sebi’s plan, with a focus on creating a smoother transition between active market hours and the close. The proposed structure introduces a one-minute transition break following the end of regular trading, leading into a nine-minute CAS window, followed Under the first temporal model, the regular market would conclude at 3:30 PM, with the entire auction and derivatives process wrapping up Alternatively, the regulator has floated a model that concludes regular trading at 3:15 PM, allowing for a structured 30-minute interval before the close.

These adjustments are designed to provide market participants with the necessary time to reposition their books without the heightened pressure of a sudden, compressed auction cycle.

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Beyond Timing Sebi Reinforcing Guardrails

Beyond timing, Sebi is reinforcing the guardrails governing the auction process itself. The regulator confirmed that the reference price for the CAS will remain anchored to the 15-minute VWAP of the continuous trading session, and the price band will be maintained at ±3%.

To curb speculative behavior, Sebi has introduced specific constraints on order manipulation: orders placed within the ±1% band remain eligible for cancellation, whereas orders between the ±1% and ±3% thresholds are locked, allowing for modifications only when they improve the price. Furthermore, the decision to halt the dissemination of the indicative index value during the CAS is a deliberate move to prevent "noise" and prevent the potential gaming of index-linked products.

Market participants and stakeholders have been invited to submit their feedback on these proposals until October 3, a deadline that reflects the urgency with which the regulator wishes to restore stability to the closing segment of the Indian stock market.