CAS: Will derivatives expiry see return of old model?

Securities and Exchange Board of India (Sebi) may consider bringing back the earlier mechanism for determining derivatives settlement prices on weekly and monthly expiry days, according to a LiveMint news report citing sources. If implemented, the move would mark a partial change to the closing auction session (CAS) framework introduced in August.

According to the report, the daily closing auction session for the equity cash market is likely to continue. However, Sebi may propose using the earlier volume-weighted average price (VWAP) mechanism for settling weekly and monthly derivatives contracts, or a combination of VWAP and CAS prices.

However, Business Today has not independently verified the report at the time of publishing this story.

The possible changes come after sharp price movements and differences in closing levels between exchanges following the introduction of CAS.

Sebi said last Thursday that it would review the methodology for determining settlement prices of derivatives contracts after receiving feedback on the closing auction session in the equity cash market.

The regulator introduced CAS on August 3 to determine the closing prices of eligible securities. The framework was aimed at improving the price-discovery process around market close.

Following its rollout, market participants raised concerns over divergent index closing levels across exchanges, volatility in options prices and the potential for price manipulation, particularly on derivatives expiry days.

Sebi said it had received feedback from various stakeholders and would propose changes to the methodology for determining settlement prices of derivatives contracts. It also said a discussion paper outlining the proposed changes would be issued within a week.

The impact of CAS was particularly visible on Thursday, when the indicative closing value of the Sensex briefly fell around 2.5 per cent, according to data on the BSE website. The sharp movement was accompanied by a steep rise in premiums for some Sensex put options, which reportedly jumped between 400 per cent and 500 per cent during the CAS.