SEBI’s fresh plan to tame derivatives volatility on expiry days

When the clock strikes the end of an expiry day, traders in India’s options market have often found themselves watching price charts wobble like a loose hinge. The culprit? A relatively new Closing Auction Session (CAS) that, while meant to bring order, sometimes amplified the very volatility it sought to tame.

Now the Securities and Exchange Board of India (SEBI) has floated a consultation paper that sketches two alternative ways to calculate the final settlement price for derivatives. The first proposal would blend trades from the last half‑hour of regular market hours with the ten‑minute closing auction, essentially giving the auction a say but not letting it dominate.

The second option is a step back to the older playbook – using only the volume‑weighted average price (VWAP) of the final thirty minutes of ordinary trading, and completely sidelining the auction for at least a year. In plain English, SEBI is saying, “Let’s keep the auction, but don’t let it dictate the numbers that matter for futures and options.”

Why does this matter? Analysts at IIFL Capital note that the sudden swings in derivative prices on expiry days have scared off some participants since CAS was introduced on August 3. “SEBI is clearly trying to make CAS more predictable without scrapping it altogether,” they wrote, hinting that a return to VWAP‑based settlement could coax some of that lost liquidity back.

Beyond the pricing tweak, SEBI is polishing a few more knobs on the auction mechanism. Traders would no longer be allowed to cancel orders that sit more than 1 % away from the reference price, the post‑auction trading window would shrink from ten minutes to five, and the regulator plans to stop broadcasting a provisional index level during the auction – all moves aimed at dampening frantic order‑cancelling and speculative spikes.

Jefferies echoes the sentiment, pointing out that tighter cancellation rules combined with a VWAP‑centric settlement framework should smooth out the “sharp price swings near the close on expiry days.” In short, the market could see fewer sudden distortions, making it a bit easier for both institutions and retail traders to price risk.

Of course, the exact impact remains a bit of a mystery. IIFL admits that without granular trader‑level data, it’s hard to predict how much trading volume might bounce back. Still, the consensus is that the proposals could lower the odds of unexpected price jumps that have, until now, haunted expiry‑day screens.

Stakeholders have until 3 October to send their feedback to SEBI. If all goes according to plan, the new rules could roll out in October or November, giving the market a fresh start before the next cycle of expiry days begins.