Sebi tweaks CAS framework, restores 30-minute VWAP for expiry settlements

The Securities and Exchange Board of India (Sebi) has made key changes to the contentious closing auction session (CAS) framework, reverting to the earlier method of calculating settlement prices for stock and index derivatives on expiry days.

In a circular late on Thursday, the regulator said the volume-weighted average price (VWAP) of underlying stocks during the last 30 minutes of normal trading will be used to determine derivatives settlement prices. Sebi has also tweaked closing auction session timings and rules for handling pending orders.

Under the new rules, index derivatives about to expire will be settled using the index value calculated from VWAPs of stocks that are part of the index during the last 30 minutes of normal trading. In the case of stock derivatives, the settlement price will be based on the stock’s VWAP.

This marks a departure from the CAS rules introduced in August, under which closing prices determined through the auction were also used to settle expiring stock and index derivatives.
In the CAS session, buy and sell orders are collected instead of being executed immediately. The shift to the auction system was aimed at making closing-price discovery more efficient and reducing the impact of orders placed near the end of the session.

The new system drew strong criticism from sections of the market, as low participation in the auction and uncertainty over indicative values of the Nifty and Sensex kept market participants on edge, with derivatives traders complaining of sharp losses on expiry days.
Under the new rules, CAS will continue to determine the official closing prices of the 200-odd stocks covered by the auction, while derivative settlement prices on expiry days will be calculated using the VWAP of underlying stocks during the final 30 minutes of normal trading.

Addressing Concerns of Market Players

“Sebi has demonstrated its responsiveness to market needs by recognising the importance of separating derivatives settlement from the closing auction session (CAS), allowing each to serve its distinct purpose,” said Ravi Varanasi, partner, SPRV Consultants. “Retaining the 30-minute VWAP methodology for derivatives settlement while preserving CAS for cash market price discovery is a pragmatic decision.”

Following protests by market participants, Sebi had sought public comments on the functioning of the auction session, market timings and the methodology for calculating derivatives settlement prices.

Revised Trading Hours

Under the revised system, normal trading in stocks covered by CAS will continue until 3:30 pm, instead of ending at 3:15 pm. CAS will run from 3:30 pm to 3:40 pm on all trading days.

The first minute will be used to calculate the reference price and transfer orders from normal trading to the auction. Both limit and market orders will be allowed between 3:31 pm and 3:36 pm. Thereafter, only limit orders can be placed, while existing market orders cannot be modified or cancelled. The order entry period will close randomly between 3:38 pm and 3:40 pm, after which orders will be matched to determine the closing price.

Under the new timings, index derivatives will trade until 3:45 pm, but those expiring that day will close at 3:30 pm. Stock derivatives will trade until 3:45 pm, even on expiry days. The cash market will reopen from 3:50 pm to 4 pm for trades at the closing price.

Sebi has clarified how pending orders will be handled during the transition to CAS.

Unexecuted limit orders will generally carry forward to the auction session, except stop loss orders and orders priced outside the permitted price bands.