SEBI to release new closing auction guidelines
What's the story
The Securities and Exchange Board of India (SEBI) is set to issue new guidelines for price settlement in the derivatives segment during the closing auction session. The announcement was made by SEBI chairman Tuhin Kanta Pandey at a BSE Broker's Forum event on Saturday. He said, "We are currently examining the comments and hope to issue guidelines in about a week's time."
CAS introduction
The closing auction session (CAS)
The Closing Auction Session (CAS) was introduced on August 3, to determine the closing prices of select futures and options (F&O) stocks in India.
The new mechanism replaced the volume-weighted average price (VWAP) method that was previously used.
However, just a month into its operations, CAS faced several issues and drew criticism from market participants due to sudden price fluctuations and uncertainty on expiry days in the derivatives market.
Proposed amendments
Proposed changes to CAS
To address the concerns, SEBI issued a consultation paper proposing changes to the CAS mechanism.
The regulator suggested that expiry-day settlement prices for index and stock derivatives could be determined using trades from the last 30 minutes of continuous trading session (CTS) and last 10 minutes of closing auction session.
Alternatively, it has also proposed sticking with the existing VWAP method for now, before possibly transitioning to a blended approach after at least one year of experience with CAS.
IIV concerns
Indicative index values
SEBI has also proposed to stop dissemination of indicative index value (IIV) during CAS while continuing to provide indicative equilibrium prices (IEPs) for individual securities.
The draft paper said that the IIV, derived from evolving IEPs, can be mistaken for an actual index level even if no trades have taken place at that level.
Indicative Equilibrium Price and Indicative Index Value are real-time estimates displayed during the stock market's closing auction session.
Timing adjustments
On market timings
On market timings, SEBI has suggested two alternatives.
The first would see the CTS for CAS stocks running until 3:30pm followed by CAS from around 3:30pm to 3:40pm with derivatives trading continuing until 3:45pm.
The second option is to keep the existing 3:15pm cut-off for CTS in CAS stocks, run CAS until 3:25pm and end derivatives trading at 3:30pm.