SEBI Proposes Major Overhaul of Closing Auction Session and Derivative Settlement Rules to Protect Investors
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In a major regulatory move aimed at enhancing market transparency and safeguarding retail and institutional investors, the Securities and Exchange Board of India (SEBI) has proposed sweeping reforms governing the stock market's Closing Auction Session (CAS) and the expiry-day settlement of derivative contracts. Having initially implemented the CAS framework for shares in the derivatives segment on August 3, 2026, SEBI initiated a thorough review following observations of extreme volatility and rapid price action during the closing window. The proposed changes are designed to eliminate misleading market signals, streamline price determination, and ensure that closing prices accurately reflect true underlying market sentiment.
Addressing Concerns Over Indicative Index Value (IIV) Dissemination
A central pillar of SEBI’s review focuses on the Indicative Index Value (IIV) displayed during the Closing Auction Session. SEBI noted that the IIV—generated based on potential orders during CAS—is frequently misconstrued by traders as the actual, executed index level, potentially inducing uninformed trading decisions. To prevent market distortion, SEBI has proposed discontinuing the public display of the Indicative Index Value during CAS entirely. However, the dissemination of the Indicative Equilibrium Price (IEP) for individual stocks will continue as usual, allowing market participants to track single-security pricing without macro-index confusion.
Proposed Options for Expiry-Day Derivative Settlement Prices
To address settlement anomalies on expiry days, SEBI has outlined two distinct options for determining the settlement price of index and stock derivative contracts. Under Option 1 (Blended VWAP), the final expiry settlement price would be calculated by combining the Volume Weighted Average Price (VWAP) from the last 30 minutes of continuous trading with the VWAP of the 10-minute CAS window. Alternatively, Option 2 (CTS VWAP) proposes relying solely on the VWAP of the final 30 minutes of continuous trading as an interim arrangement before ultimately transitioning to the blended model in the long run.
Proposed Adjustments to Market Timings, Order Rules, and Iceberg Orders
SEBI’s consultative document also introduces structural modifications to trading schedules and execution rules. Two options regarding market timings are under consideration:
Option A maintains continuous trading until 3:30 PM, followed by CAS until 3:40 PM and F&O trading until 3:45 PM
Option B closes continuous trading at 3:15 PM, CAS at 3:25 PM, and F&O trading at 3:30 PM. Additionally, the transition buffer between continuous trading and CAS is proposed to be compressed from 5 minutes to 1 minute, while the post-CAS F&O window would be reduced from 10 minutes to 5 minutes. The existing ±3% price band in CAS remains unchanged, orders deviating by more than ±1% cannot be canceled (though price-improving adjustments are allowed), and unfulfilled iceberg orders from continuous trading will transition into CAS as standard limit orders with their full remaining quantities visible in the order book.
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