SEBI Proposes Major Changes to Derivatives Expiry-Day Pricing Rules

MUMBAI, September 12: The Securities and Exchange Board of India (SEBI) has proposed major changes to the way final settlement prices for equity derivatives are calculated on expiry days, following heightened volatility after the introduction of the new Closing Auction Session (CAS) in the cash market.

The regulator is considering alternative pricing methods aimed at reducing sudden price distortions near the market close and improving stability for traders holding futures and options contracts.

Two Settlement Pricing Options Proposed

Under the first option being considered, the final settlement price for derivatives would be calculated using prices from the last 30 minutes of regular trading combined with the 10-minute Closing Auction Session.

A second option would temporarily separate derivatives settlement from the closing auction and calculate the settlement price using only the final 30 minutes of regular trading.

According to Reuters, this second arrangement could remain in place for around one year while SEBI evaluates the performance of the new closing-price mechanism.

Why SEBI Is Reviewing the Rules

India introduced the Closing Auction Session on August 3, 2026 to improve transparency and efficiency in determining the official closing prices of stocks.

However, market participants subsequently reported increased volatility around expiry days, when large derivatives positions are settled using the closing value of the underlying stock or index.

SEBI had formally announced on September 3 that it would review the settlement-price methodology following the CAS rollout.

Additional Changes to Closing Auction Rules

SEBI has also proposed several changes to the auction process itself.

These reportedly include:

• Restricting cancellation of certain limit orders placed more than 1% away from the reference price
• Reducing the post-closing auction period to five minutes
• Stopping the display of indicative index closing levels during the auction
• Continuing to display indicative equilibrium prices for individual stocks

The changes are intended to reduce the possibility of abrupt price movements and improve the reliability of closing-price discovery.

Expiry-Day Volatility Became a Key Concern

The issue became more prominent after sharp movements were observed during recent weekly derivatives expiries.

Because the closing price of an underlying index or stock is used to determine the final settlement value of derivatives contracts, even relatively short-lived movements near the close can have a significant impact on futures and options traders.

SEBI’s existing framework links the final settlement price of derivatives to the closing price of the underlying asset on the expiry or last trading day.

Public Comments Invited Until October 3

SEBI has invited feedback from market participants on the proposed framework until October 3, 2026.

The regulator is not seeking to abandon the Closing Auction Session but is instead looking to refine the system so that closing-price discovery in the cash market does not create unnecessary instability in the derivatives segment.

Any final changes could have a significant impact on traders, brokers, institutional investors and participants in India’s large futures and options market.

source – Reuters / SEBI
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