SEBI's Updated Closing Auction Rules For Derivatives Expiry May Boost F&O Trading Volumes
· Free Press Journal
India's equity derivatives market could witness a recovery in trading activity after the Securities and Exchange Board of India (SEBI) reversed a controversial settlement mechanism that had created uncertainty among market participants.
The regulator announced on Thursday that derivatives expiring on a particular trading day would be settled using the volume-weighted average price (VWAP) of underlying stocks during the final 30 minutes of continuous trading.
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The decision effectively reverses a key provision of the closing auction session (CAS) introduced on Aug 3, which had triggered sharp fluctuations in settlement reference prices.
As per a report by Bloomberg, market participants believe the change could improve transparency and restore confidence in futures and options trading.
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HDFC Securities Managing Director Dhiraj Relli said the restored mechanism would offer traders greater clarity and predictability in determining settlement prices.
He expects the change to reduce uncertainty and potentially support a gradual recovery in derivatives trading volumes.
The earlier auction system had coincided with a significant decline in market activity. During August, average daily equity derivatives turnover on the National Stock Exchange of India fell to an 18-month low.
Turnover on BSE declined by approximately one-third before showing a modest recovery in September. Market experts believe the return to VWAP could make expiry-day pricing less vulnerable to sudden fluctuations.
Brokers, Traders May Benefit
As per market analysts, the revised settlement process could reduce expiry-day volatility and support brokerage transaction volumes.
A more predictable pricing mechanism could also benefit proprietary trading firms and arbitrageurs by simplifying hedging strategies and risk management.
Restoring the previous VWAP methodology could reduce distortions and encourage traders who had withdrawn because of pricing concerns to return.
However, SEBI's broader restrictions aimed at controlling excessive speculation in derivatives trading remain in place.
Consequently, any sustained recovery in trading volumes will depend on market participation and prevailing regulatory conditions.