SEBI to Review Derivative Settlement Post-CAS; Consultation Paper Soon
India's market regulator, SEBI, will review the methodology for settling derivative contracts following concerns over volatility after the recent rollout of the Closing Auction Session (CAS). A consultation paper detailing proposed changes is expected within a week. This move addresses feedback from traders regarding unpredictable price swings on expiry days.
Key Highlights
- SEBI reviewing derivative settlement methodology.
- Concerns arose post-Closing Auction Session (CAS) rollout.
- Consultation paper on proposed changes expected in a week.
- Market volatility, price swings cited on expiry days.
- CAS implemented from early August 2026 in equity cash.
- Review aims to balance transparency and market liquidity.
The Securities and Exchange Board of India (SEBI) has announced that it will review the methodology used to determine settlement prices for derivative contracts. This decision comes in response to significant feedback and concerns from market participants regarding the impact of the newly introduced Closing Auction Session (CAS) on expiry-day settlement prices. The regulator, on Thursday, September 3, 2026, indicated that it may propose changes to the existing methodology and plans to issue a consultation paper on the proposed framework in approximately one week.
The Closing Auction Session (CAS) was rolled out in the equity cash segment on August 3, 2026, with the primary objective of enhancing transparency in closing price discovery for securities. Under the framework introduced through SEBI's circular dated January 16, 2026, the closing price determined through CAS also serves as the basis for the settlement prices of derivative contracts on expiry. However, shortly after its implementation, market participants began to flag issues related to increased volatility and unpredictable price swings in derivative contracts, particularly on their expiry days.
Traders reported sharp expiry-day moves following the introduction of CAS. For instance, on a recent Thursday, the BSE Sensex experienced a significant plunge of about 2,100 points in the initial five minutes of the auction session, only to recover subsequently, eventually closing 417 points lower. Such dramatic fluctuations during the CAS window, especially in the final minutes of trading when contracts are near expiry, led to substantial changes in option prices. Examples include a 76,600 put option jumping from Rs 102 to Rs 446 and a 76,400 put surging from Rs 45 to Rs 246 on a specific Thursday, highlighting the amplified concerns over how CAS prices influenced derivative settlements.
SEBI stated that it has closely monitored the functioning of CAS and its market impact during the first month of its operation. The regulator received extensive feedback and suggestions from various market participants, including stock exchanges, brokers, proprietary traders, software vendors, mutual funds, industry associations, and foreign portfolio investors, through multiple channels, including social media. A significant area of this feedback related directly to the use of CAS-determined closing prices for settling derivative contracts on expiry.
Despite the concerns, SEBI reaffirmed that the CAS framework itself was introduced after extensive stakeholder consultations and detailed policy deliberations. These consultations included two rounds of public engagement held in December 2024 and August 2025, alongside discussions with advisory committees and various stakeholders. The inputs gathered during these consultations were carefully examined and considered when finalizing the CAS framework, which aims to bring Indian markets in line with global practices for closing price discovery. The review, therefore, is focused on the *methodology for determining settlement prices of derivative contracts* rather than a rollback of the CAS mechanism itself.
Beyond price volatility, the initial weeks of CAS implementation also saw market participants express concerns over low awareness and system preparedness, leading to confusion among traders. Data indicated a sharp decline in trading volumes, with derivative turnover falling to a 14-month low in August 2026, and F&O turnover experiencing its sharpest fall of 22 percent since December 2024. The move by SEBI to review the settlement pricing methodology is expected to address these challenges and find a balance between transparent closing price discovery and maintaining healthy liquidity and stability in the derivatives market.
The upcoming consultation paper will provide further details on the specific changes SEBI is considering. This proactive approach by the regulator signals its commitment to responding to market feedback and making necessary adjustments to ensure fair and efficient market operations within India's dynamic financial landscape.
Frequently Asked Questions
What is the primary reason for SEBI's review of derivative settlement prices?
SEBI is reviewing the methodology for derivative settlement prices due to concerns raised by market participants about increased volatility and sudden, unpredictable price swings on expiry days, which have been observed since the implementation of the Closing Auction Session (CAS).
What is the Closing Auction Session (CAS) and when was it implemented?
The Closing Auction Session (CAS) is a mechanism introduced by SEBI in the equity cash segment from August 3, 2026, to determine the closing price of securities by matching the maximum number of buy and sell orders during the last 15 minutes of a trading day.
Will SEBI roll back the CAS mechanism?
No, SEBI's review focuses on the methodology for determining derivative settlement prices and does not indicate a rollback of the CAS mechanism itself. CAS was introduced after extensive consultations to improve closing price discovery and align with global practices.
When can the market expect a consultation paper from SEBI regarding these changes?
SEBI has stated that a consultation paper detailing the proposed changes to the derivative settlement price methodology is expected to be issued in approximately one week from September 3, 2026.
What kind of impact has CAS had on the market, prompting this review?
The CAS rollout led to feedback about sharp price spikes and distortions, especially on expiry days, affecting derivative contract values. There were also concerns about low awareness, system preparedness, and a noticeable contraction in derivative trading volumes in the initial period.