Sebi Proposes Changes To Closing Auction Session, F&O Settlement Rules: Key Proposals Explained

Securities and Exchange Board of India (Sebi) has proposed reviewing certain aspects of the Closing Auction Session (CAS) in a consultation paper released on September 12, 2026. The market regulator is also seeking to review the market timings and the settlement methodology for derivatives contracts and has proposed two options for determining expiry-day settlement prices for index and single-stock derivatives.

Notably, Sebi introduced the CAS in the equity cash segment on August 3, 2026, for those securities which have futures and options contracts. The CAS framework was introduced to increase transparency in the calculation of closing prices.

Prior to the implementation of CAS, the closing price was calculated using the Volume Weighted Average Price (VWAP) method. Under the previous method, the VWAP of trades executed during the last 30 minutes of the session was used to determine the closing price. However, under CAS, the closing price is determined through an auction mechanism which combines all buy and sell orders to arrive at a single equilibrium price for eligible securities.

However, following its rollout in August, several stakeholders such as retail investors, brokers, and institutional investors have raised concerns around volatility and discrepancies in closing prices across the exchanges. In order to address these concerns, Sebi has proposed certain changes to the CAS mechanism.

Settlement Methodology: Option 1 (Blended VWAP)

Under the current framework, the expiry-day settlement prices for index and stock derivatives are determined only using the final closing prices discovered through the CAS. However, Sebi has proposed to consider a change because data showed  trading concentration in expiring options during the short CAS window as the average per-minute premium turnover surged high compared to pre-CAS levels. Thus to mitigate this problem, Sebi has proposed a blended VWAP mechanism which calculates the settlement price by combining actual trades from the last 30 minutes of the continuous trading session and the 10-minute CAS weighted by the actual traded turnover.

Emphasising the structural benefit of expanding the volume base to prevent price distortion, the regulator detailed the mechanism.

"The proposed framework would incorporate actual transactions executed during both the last 30 minutes of CTS and 10 minutes of CAS for determination of the settlement price of the derivatives contracts on the expiry day, thereby reflecting a broader period of actual market transactions," Sebi said.

For retail investors, the blended calculation will cushion option contracts against sudden end-of-day price manipulation by factoring in broader continuous market liquidity.

Settlement Methodology: Option 2 (Interim CTS VWAP)

Under the existing framework, derivatives settlement relies completely on CAS closing values. Thus Sebi is considering a mechanism which will revert the settlement methodology to the pre-CAS formula in which closing prices will be determined using only the last 30 minutes of CTS VWAP for an interim period of at least one year before transitioning to Blended VWAP once auction depth matures. Notably, this is being considered because CAS is in a nascent phase where participants are still adjusting their trading strategies, and a sudden transition during such periods has heightened uncertainty for both buyers and sellers.

“The CTS VWAP methodology for determination of the settlement price for derivatives contracts on expiry day during an interim period would provide continuity with the familiar settlement methodology for derivatives contracts on expiry day, and provide a stable and orderly transition to CAS," Sebi said.

For retail investors, this interim rollback is expected to restore familiar settlement pricing and decrease unexpected expiry-day losses while the wider market gets accustomed to auction mechanics.

Discontinuation Of Indicative Index Value During CAS

Under the present CAS system, exchanges determine and broadcast a live Indicative Index Value (IIV) throughout the auction session. The IIV is based on the Indicative Equilibrium Prices (IEP) which keep changing during the session.

Sebi is considering withdrawing this broadcast as traders often end up misconstruing these indicative benchmark swings as actual traded index levels, executing speculative derivative trades on false price signals. Sebi has therefore proposed stopping the dissemination of IEP-derived IIV while continuing to display individual stock-level IEPs. For retail investors, halting this indicative feed can prevent panic trading triggered by ‘index moves’ that do not reflect actual executed market prices.

"IEP-derived Indicative Index Value is not disseminated during CAS, as the same is being misinterpreted and/or positions are being taken by the stakeholders," Sebi said.

Review Of Market Timings

In the current setup, CTS for CAS stocks stops at 3:15 PM. This is followed by a five-minute transition gap, a 10-minute CAS window, and derivatives trading which extends until 3:40 PM. In its observation, Sebi found substantial speculative derivatives turnover during the five-minute idle transition period, while noting that a 10-minute post-auction window is unnecessarily long once underlying prices are already discovered.

To solve this timing issue, Sebi has proposed two timing structures, Option A allows continuous trading for all stocks until 3:30 PM, CAS from 3:31 PM to 3:40 PM, and derivatives until 3:45 PM. On the other hand the Option B keeps the continuous session on till 3:15 PM for CAS stocks, runs CAS from 3:15 PM to 3:25 PM, and closes derivatives at 3:30 PM. For retail investors, streamlined session timings and a shorter post-close session will minimize execution delays and lower the risk of late-session whipsaws.

"It is proposed to reduce this transition period from the existing five minutes to up to one minute. This reduces the substantive transition period between CTS and CAS while retaining sufficient time for the Exchanges to complete the operational processes," Sebi said.

Restrictions On Limit Order Cancellations Beyond 1%

Currently, traders can freely place, modify, and cancel limit orders anywhere within the full plus or minus 3 per cent price band during the closing auction session. However, Sebi is considering curbs as these unrestricted cancellations allow market participants to place transient, non-committal orders between plus or minus 1 per cent to 3 per cent of the Reference Price, creating artificial depth and manipulating auction expectations before withdrawing. Sebi has proposed making limit orders placed beyond plus or minus 1 per cent non-cancellable, permitting only price-improving modifications.

"The proposed framework seeks to distinguish between the orders placed relatively close to the Reference Price, where market participants may reasonably require flexibility to revise or withdraw their trading interest; and the orders placed materially away from the Reference Price, where continued cancellation flexibility may provide greater scope for transient or non-committal trading interest to influence the auction book," Sebi said.

For retail investors, this safeguard can reduce instances of issues such as spoofing and phantom liquidity, making the auction order book far more reliable.

Transition Of Unexecuted Iceberg Orders To CAS

Under the CAS framework, unexecuted iceberg orders from the continuous session are completely excluded from CAS because CAS requires full order visibility, whereas iceberg orders mask pending volume. Notably iceberg orders refer to those large trade whose total quantity is divided into smaller disclosed chunks, thus only a specific portion is visible in the order book at any given time while the balance stays hidden.

Sebi is considering this change because dropping these orders drains liquidity from the auction and penalises participants who placed institutional-sized orders during the continuous session. To preserve the liquidity in the market, Sebi has proposed converting unexecuted iceberg portions at the end of CTS into standard limit orders with their full remaining volume displayed transparently in CAS.

"Transitioning the unexecuted quantity to CAS would enable such outstanding trading interest to participate in the closing auction along with other eligible orders," Sebi said.

As the CAS remains in its early stages of implementation, Sebi is actively examining its operational nitty-gritties to address the concerns raised by market participants. The regulator has invited public feedback and suggestions on all proposals outlined in the consultation paper, which can be submitted online or via email by October 3, 2026.