SEBI’s CAS proposals: Expert weighs in on new expiry-day settlement price methodology

The Securities and Exchange Board of India's two alternative proposals to determine expiry day settlement prices of index and single stock derivatives, in the backdrop of complaints raised in relation to the closing auction session has drawn a mixed reaction from an expert.

On Saturday, the market regulator issued a consultation paper proposing two alternatives. One option is that settlement prices for both index and stock derivatives would be calculated using transactions executed during the last 30 minutes of continuous trading (CTS) and 10 minutes of CAS. SEBI calls this the “Blended VWAP (volume weighted average price)” methodology.

The second option is to use only transactions executed during the last 30 minutes of CTS to determine expiry-day settlement prices for both index and single-stock derivatives.

Transactions executed during the CAS would not be a part of the settlement calculation during the interim period.

SEBI says this option would not only provide market participants time to adjust to the closing auction mechanism, but also allow liquidity to develop.

Trivesh D., the COO of Tradejini, believes the second option for determining the expiry day settlement price where the settlement price is based on the VWAP of trades during the last 30 minutes of continuous trading, as it was the practice earlier, would be good.

He said this is a simpler and more established methodology than the first option.

"A blended VWAP based on both continuous trading and the CAS could add another layer of complexity to the settlement process. It would also make the final settlement price dependent on two different trading mechanisms and would require market participants to assess the relative impact of activity across both periods," he said.

The closing price auction was rolled out in August for efficient discovery of closing stock prices. This replaced the earlier VWAP (volume weighted average price) system.

However, there have been complaints about large, sudden swings and last-minute order imbalances, with the impact more on derivative expiry days. Liquidity issues too have been flagged.

Speaking with reporters at the Global Fintech Fest earlier this week, SEBI Chairman Tuhin Kanta Pandey said, "CAS is here to stay."

Pandey said that MSCI had in fact acknowledged that the recent rebalancing went well under CAS.

"Many market participants have told us that initially everywhere the CAS was brought in, liquidity was always an issue and it builds up over time," he had pointed.

Trivesh of Tradejini says the objective should be to have a settlement methodology that is transparent, easy to understand, and consistent for all market participants.