BSE shares jump 5% as SEBI reviews derivative settlement rules
What's the story
The Bombay Stock Exchange (BSE) witnessed a nearly 5% surge in its share price to ₹3,474 during today's market session. The spike came after the Securities and Exchange Board of India (SEBI) announced plans to review the methodology for determining settlement prices of derivatives contracts. The decision was made following feedback on the closing auction session in the equity cash market, which was launched by SEBI on August 3.
Regulatory review
SEBI receives feedback on CAS issues
SEBI's decision comes after complaints about the Closing Auction Session (CAS) leading to divergent index closing levels across exchanges, volatile options pricing, and fears of potential manipulation.
The regulator said it has received feedback from a wide range of stakeholders and is considering proposing changes in the methodology for determining settlement prices of derivative contracts.
Upcoming publication
Discussion paper on proposed changes to be issued soon
SEBI has also announced its intention to issue a discussion paper outlining the proposed changes within a week.
A major concern is how settlement prices for derivative contracts on expiry are determined using the closing price determined through CAS.
The regulator said, "Having considered the experience of the initial period of CAS implementation and the feedback received from various stakeholders, SEBI may be proposing certain changes in the methodology for determination of settlement prices of derivative contracts."
Market impact
BSE MD acknowledges drop in index option volumes
Sundararaman Ramamurthy, MD & CEO of BSE, acknowledged that index option volumes have decreased due to the new CAS.
He said, "liquidity is an important requirement of a CAS system" and admitted that participation has been lacking due to this lack of liquidity.
Ramamurthy also revealed they have been conducting dealer meetings on CAS and received feedback such as delinking F&O expiry from CAS and implementing it gradually.
Trading decline
CAS has led to sharp swings and price divergences
Since its launch, the CAS has led to sharp swings and price divergences in benchmark indices.
Liquidity during this 20-minute process has been thin and largely dominated by institutions.
Exchange data showed CAS trades accounted for less than 1% of daily cash-market turnover and less than a third of volumes seen under the previous system.
The lower participation means relatively small buy or sell orders can have an outsized impact on key indices.