The Securities and Exchange Board of India (SEBI) is reportedly set to release a consultation paper on the Closing Auction Session (CAS) framework as early as Saturday, 13 September, proposing changes to how settlement prices for derivative contracts are determined on expiry days, according to a report by NDTV Profit. The proposal is expected to come up for discussion at the SEBI board meeting scheduled for 24 September.

What SEBI is proposing

The regulator is not planning to scrap the CAS mechanism itself but aims to refine the methodology used to calculate settlement prices under the auction framework on expiry days. SEBI Chairman Tuhin Kanta Pandey had earlier stated that 'CAS is here to stay,' while acknowledging that concerns raised by market participants were being examined for resolution.

The consultation paper is expected to address specific pain points flagged by traders and institutional participants around the pricing methodology — particularly the outsized price swings observed during the auction window on derivatives expiry days.

How CAS works and why it matters

CAS, which came into effect on 3 August, ends continuous trading in futures-and-options (F&O) eligible stocks at 3:15 pm IST, shifting those securities into a roughly 20-minute auction window where buy and sell orders are matched to determine the official closing price. Non-F&O stocks continue trading until 3:30 pm, while stock and index derivatives trade until 3:40 pm.

The mechanism was introduced to improve closing price integrity, but its early weeks have exposed structural vulnerabilities — especially on expiry days, when thin participation in the auction window has amplified price dislocations.

Expiry-day volatility under the spotlight

Indian equities have witnessed sharp, often disruptive moves during the closing auction session on derivatives expiry days since the mechanism's launch. Last week, the indicative close for the Sensex reportedly dropped 2.5 per cent briefly during the auction, causing put options premiums to surge between 400 and 500 per cent. Similarly, on Tuesday, Nifty put options saw multi-fold surges during expiry-day trading.

Analysts have noted that CAS has made expiry-day execution less predictable for systematic options strategies, with limited participation in the auction potentially allowing a handful of large orders to move closing prices significantly. This comes amid broader concerns about retail trader exposure to expiry-day derivatives volatility — a theme SEBI has been addressing through a series of regulatory tightenings over the past year.

What happens next

The consultation paper, if released this weekend, will invite public feedback before any regulatory change is formalised. The 24 September board meeting is likely to deliberate on the feedback and decide on revised settlement-price norms. Market participants, including institutional desks and proprietary trading firms, are expected to submit detailed responses, given the direct impact on hedging and options settlement strategies.

Industry bodies including brokers' associations have reportedly flagged the need for a broader participation window or alternative price-discovery safeguards to prevent thin-liquidity distortions. The outcome could shape how India's derivatives market — the world's largest by volume — handles expiry-day settlement going forward.