SEBI Proposes New Derivatives Settlement Framework and Overhaul of Closing Auction Session

The Securities and Exchange Board of India (SEBI) has issued a public consultation paper proposing extensive modifications to the Closing Auction Session (CAS) framework and derivative settlement methodologies across Indian stock exchanges. The market regulator's proposal comes following feedback from market participants regarding volatility and liquidity challenges observed during contract expiry days since the introduction of the CAS framework for stock derivatives. Central to the regulatory proposal is the introduction of a Blended Volume-Weighted Average Price (VWAP) calculation for expiry-day settlement of futures and options (F&O) contracts. Under the proposed mechanism, settlement prices will be determined using trade data from both the final 30 minutes of the Continuous Trading Session and the 10-minute Closing Auction Session. SEBI has also presented an alternative option that retains the existing continuous trading session VWAP while delaying any shift to a blended calculation for at least one year. Additionally, SEBI proposed streamlining order cancellation windows and refining indicative price displays during closing auctions to prevent order book manipulation. Market experts have broadly welcomed the consultation paper, noting that the revised mechanisms will enhance market integrity, reduce sudden volatility spikes, and protect institutional and retail investors during derivative contract settlements. Public comments on the proposed framework are open until October 3, 2026.