SEBI Proposes Changes to Closing Auction Session Framework

Source: The Hindu

Context
SEBI issued a consultation paper proposing changes to derivatives settlement methodology, market timings and operational aspects of the Closing Auction Session (CAS) — weeks after the new closing price mechanism took effect. Seven proposals, with comments invited by 3 October 2026.

Key Proposals

1. Expiry-Day Settlement Price
   • Option 1: Use a blended VWAP from the last 30 minutes of continuous trading + 10-minute CAS.
   • Option 2: Continue using CTS VWAP based only on the last 30 minutes before CAS.
   • SEBI suggests retaining CTS VWAP for at least one year before considering a change.
2. Stop Indicative Index Value (IIV)
   • Security-level IEPs will continue, but the indicative index value during CAS may be discontinued.
   • Reason: IIV is based on unexecuted indicative prices, not actual trades.
3. Market Timings
   • Option A: CAS from 3:31–3:40 pm, derivatives until 3:45 pm.
   • Option B: CAS stocks trade until 3:15 pm, CAS from 3:15–3:25 pm, derivatives end at 3:30 pm.
4. Shorter Transition
   • Gap between continuous trading and CAS may be reduced from 5 minutes to about 1 minute.
5. Shorter Derivatives Window
   • Post-CAS derivatives trading may be reduced from 10 minutes to 5 minutes.
6. Order Cancellation Restriction
   • Orders within ±1% of the reference price can be cancelled.
   • Orders beyond 1% and up to 3% cannot be cancelled, but can be modified to improve their price.
7. Iceberg Orders
   • Unexecuted iceberg orders can move into CAS.
   • Their remaining quantity will become a normal limit order and the full quantity will be visible in the CAS order book.

Key Terms

• CAS: Closing Auction Session used to discover the closing price through an auction.
• IEP: Indicative Equilibrium Price; the price at which maximum executable quantity can potentially be matched during an auction.
• VWAP: Volume Weighted Average Price, where prices are weighted according to trading volume.
• CTS VWAP: Closing Trading Session VWAP based on trades during the specified pre-CAS period.
• IIV: Indicative Index Value calculated during CAS using indicative prices of index constituents.
• Iceberg Order: An order where only part of the total quantity is normally visible to the market.
• Price Discovery: The process through which buying and selling interests determine a market price.