India regulator eases derivatives settlement rules after trader pushback

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India eases derivatives rules

Highlights

SEBI will settle expiring stock and index derivatives using volume-weighted average prices from the last 30 minutes of trading, replacing closing auction prices, effective December 7.
The revised framework keeps the closing auction session for cash-equity prices from 3:30 p.m. to 3:40 p.m., with specific order entry periods and random close between 3:38 p.m. and 3:40 p.m.
SEBI changed settlement rules after the August 3 CAS rollout triggered volatility and lower derivatives volumes, aiming to stabilize expiry pricing while keeping CAS for the cash market.

Revised settlement framework and trading hours

As reported by Reuters, citing the Securities and Exchange Board of India, expiring stock and index derivatives contracts will be settled using volume-weighted average prices from the final 30 minutes of regular trading instead of closing auction prices.

The regulator said in a circular that the closing auction session, or CAS, will continue to determine the closing prices of applicable cash-equity securities. The changes take effect on December 7.

Under the revised framework, CAS will run as a separate 10-minute session from 3:30 p.m. to 3:40 p.m. on all trading days, with order entry closing randomly between 3:38 p.m. and 3:40 p.m. Traders may enter both limit and market orders from 3:31 p.m. to 3:36 p.m., after which only limit orders are allowed.

Expiring index derivatives will stop trading at 3:30 p.m. on expiry days. Stock derivatives will continue trading until 3:45 p.m. on all trading days, including expiry days, while the cash-market post-close session will run from 3:50 p.m. to 4 p.m. with trades executed at the closing price.

Market impact after August rollout

SEBI had implemented CAS from August 3, but the move drew a backlash after sharp swings in stock and index levels near the close. Erratic price movements in expiring derivatives contracts also led traders to pull back on volumes.

The partial reversal suggests the regulator is trying to reduce disruption in derivatives expiry pricing while preserving the auction-based close for the cash market. For market participants, the change narrows the immediate effect of the auction mechanism on expiring contracts and may help stabilize end-of-session trading conditions.

Our earlier article on the RBI’s rupee defence explained that the central bank has drawn down a large share of the foreign-exchange buffer raised through special measures since June, using spot dollar sales and swaps to support the currency and manage liquidity. We noted that pressure from high oil prices, higher U.S. yields and foreign outflows has intensified, prompting additional steps to curb dollar demand and raising questions about how much further reserves can be deployed if the rupee weakens toward key levels.

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