SEBI is scrapping the controversial closing-auction mechanism for settling derivatives, a move that directly addresses the volatility headaches plaguing Indian markets since August. The regulator’s circular, issued late Thursday, mandates that settlement prices for index and stock derivatives will now rely solely on the volume-weighted average price (VWAP) of the final 30 minutes of trading. The change takes effect on December 7, a date chosen to give brokers and traders time to adjust their systems after months of uncertainty.
The decision comes after the new framework, launched in August, triggered sharp, erratic price movements on expiry days. Those swings raised alarms among institutional investors who found it difficult to hedge positions when the settlement price was dictated by a 10-minute auction rather than a continuous trading session. By excluding auction trades from the final settlement calculation, SEBI aims to decouple the cash market’s closing procedure from the derivatives settlement logic.
"SEBI has reverted to the tried-and-tested volume-weighted pricing mechanism, a move that should help restore trading volumes and bring participants back to the market," said Tejas Shah, head of equity derivatives at Equirus Securities Pvt. He noted that the curtailment of auction timings on non-expiry days is also expected to recover lost liquidity. For traders, this means the final 30 minutes of trading will once again carry the full weight of determining the daily settlement, a structure that had been in place for years before the recent experiment.
The reversal follows a rigorous review process initiated in September. SEBI Chairman Tuhin Kanta Pandey confirmed the regulator received approximately 20,000 comments on a discussion paper proposing changes to the framework, signaling widespread industry dissatisfaction with the status quo. The new rules also tighten the transition window: the shift from continuous trading to the closing auction is shortened from five minutes to just one minute. On expiring days, trading in index and stock derivatives will stop at 3:30 pm, while continuous trading in cash stocks covered by the auction will also run until 3:30 pm, aligning with other cash securities before the 10-minute auction begins at 3:40 pm.
Market participants are watching closely to see if this policy U-turn stabilizes the derivatives segment. The next critical test will be the first expiry cycle post-December 7, where traders will scrutinize whether the volatility has truly subsided and if volumes return to pre-August levels. Until then, the focus remains on how the shortened auction window interacts with the cash market close, a dynamic that continues to shape daily trading strategies.