SEBI revises settlement of expiring derivatives to average of final 30 minutes from December
Key Facts
India’s Securities and Exchange Board (SEBI) issued a revised final framework for the closing auction session on October 15, with most provisions due to take effect on December 7, 2026. The framework returns settlement of expiring derivatives to the volume-weighted average price (VWAP) method over the final 30 minutes of continuous trading. For index contracts, the settlement value will be based on average prices of the index’s constituent stocks in the cash market during that window. Stock contracts will be settled based on the volume-weighted average price of the underlying stock across exchanges. SEBI said the review aims to improve price discovery efficiency and the orderly functioning of the cash and derivatives markets, as the auction mechanism raised concerns about the effect of short-term price movements on expiring contracts.
The revised method separates derivatives settlement from price discovery in the closing auction: trades executed during the auction will not be included in the calculation of the final settlement price for expiring futures and options contracts. The mechanism launched in August raised concerns about using auction prices to settle options contracts and about sharp volatility around the close. In January 2026, SEBI had introduced the auction session in the cash equities market to improve transparency and the efficiency of closing-price discovery, and the initial framework tied settlement prices for expiring derivatives to prices set in the auction. The revision shows that the regulator has retained the auction’s role in determining the closing price while separating that price from the settlement reference for expiring contracts. The regulator did not say the change was intended to prevent manipulation, instead linking the review to price discovery efficiency and the orderly functioning of both markets.
Under the framework, the daily auction window will change from 3:15 to 3:35 p.m. to 3:30 to 3:40 p.m. From 3:31 to 3:36 p.m., market orders and limit orders will be allowed, before orders are restricted to limit orders in the next phase. Order entry will close randomly between 3:38 and 3:40 p.m. The reference price for securities eligible for the auction will also be calculated using the volume-weighted average price of trades during the final 15 minutes of continuous trading; if no trade is executed during that period, the last traded price of the day will be used. SEBI prohibited new stop-loss and Iceberg orders during the auction session and required orders placed during it to disclose their full quantity.
Among the operational changes, exchanges will calculate and publish in real time the indicative index value during the final 30 minutes of continuous trading, using average prices of its constituent stocks to estimate the potential settlement value before the close. On contract expiry day, expiring index contracts will stop trading at 3:30 p.m., while index derivatives on regular days will continue trading until 3:45 p.m. Stock derivatives will continue trading until 3:45 p.m., including on expiry days. A director at BCB Brokerage said separating stock derivatives settlement from price discovery in the auction “removes a major source of discomfort for participants.” The move followed the regulator receiving about 20,000 comments on a discussion paper that proposed changes to the auction framework, according to SEBI Chairman Tuhin Kanta Pandey.
The final framework followed a consultation paper published on September 12 on aspects of the closing auction session, market timings and the derivatives settlement method. SEBI said its decision was based on an analysis of the comments, recommendations from the Secondary Market Advisory Committee and consultations with exchanges. Exchanges and clearing corporations were asked to update their standard operating procedures in consultation with the regulator within 7 days of the circular’s issuance. Provisions for transferring unexecuted limit and iceberg orders from the continuous trading session are scheduled to take effect on February 8, 2027. Implementation will therefore take place in two phases: auction and settlement changes in December, and order-transfer rules in February.