SEBI has delinked the closing auction from derivatives expiry settlement, reversing a key part of the framework introduced in August. In a circular dated October 15, the regulator said expiring index and stock derivatives will settle at the volume-weighted average price of the underlying stocks during the last 30 minutes of continuous trading, not the CAS closing price. The change takes effect on December 7.
The reversal followed SEBI's own expiry-day data showing the short CAS window drew more option trading per minute than the longer session it replaced. The 10-minute auction, which runs from 3:30 p.m. to 3:40 p.m., concentrated order imbalances that led to wild price swings, as seen in Nifty's 500-point intra-session jump on October 21.
Impact on market makers
Moving settlement to a 30-minute VWAP is expected to ease expiry-day basis risk and lower the chance of option pay-offs being reset by cash-auction flows. A price averaged over half an hour is harder to tilt through a late order imbalance, reducing settlement risk for derivatives traders and market makers. This should help restore trader confidence and support derivatives volumes, which had been weighed down by CAS unpredictability.
The auction itself survives for determining cash market closing prices, a function important for index funds and institutional portfolio valuation. That leaves cash market participants exposed to CAS volatility, while derivatives traders gain a more stable settlement mechanism. The separation resolves the incentive misalignment that occurred when a single auction print decided both cash closes and derivative settlements.