India's market regulator has proposed changing how futures and options contracts are settled on expiry days after the country's new Closing Auction Session produced sharp price moves around the market close.
The Securities and Exchange Board of India (SEBI) floated two alternatives on September 12. Both are designed to reduce the disconnect between cash-market price discovery and derivatives settlement without abandoning the closing auction itself.
What SEBI wants to change on F&O expiry days
Under the first option, the expiry-day settlement price for index and stock derivatives would use trades from the final 30 minutes of normal trading together with the 10-minute Closing Auction Session. That would spread the calculation across a wider period instead of allowing the auction alone to have an outsized influence.
The second option would temporarily remove the closing auction from derivatives settlement calculations. Settlement would again be based on the last 30 minutes of regular trading for at least one year while SEBI assesses how the new closing mechanism behaves.
Why SEBI is reviewing the new closing auction
India introduced the Closing Auction Session in the equity cash segment on August 3 for stocks that have derivatives contracts. The aim was to improve closing-price discovery and make the process more transparent. However, expiry days have shown unusually sharp moves, creating concerns about how auction prices feed into derivatives settlement.
The review is therefore a refinement rather than a reversal. SEBI is trying to keep the benefits of an auction-based close while reducing the risk that short-lived imbalances at the end of the session distort F&O settlement prices.
Other closing-auction changes proposed by SEBI
The consultation paper also proposes tighter controls around orders placed during the closing process. SEBI wants to bar cancellation of limit orders placed more than 1% above or below the reference price, a step intended to discourage orders that can create misleading auction signals.
It has also proposed reducing the post-closing auction window for derivatives trading from 10 minutes to five minutes. Another proposal would stop displaying indicative index closing levels during the auction, while indicative equilibrium prices for individual stocks would continue to be shown.
What this could mean for traders
For F&O traders, the most important issue is how the final settlement price is determined. A broader calculation window could reduce the impact of a sudden closing-auction move on expiring contracts. Temporarily excluding the auction would go further by separating derivatives settlement from the new closing mechanism while SEBI gathers more data.
Headline Thread previously examined how India's Closing Auction Session faced a major test during the MSCI rebalance. The latest consultation shows that regulators are now responding to actual trading behaviour observed after the system went live.
SEBI is seeking public feedback until October 3
These are proposals, not final rules. SEBI has invited public comments until October 3, 2026. The regulator can modify the framework after reviewing feedback from exchanges, brokers, institutional investors and other market participants.
The proposal arrives during a busy period for India's capital markets, including the NSE IPO process and several recent regulatory and market-structure changes.
What happens next
The immediate date to watch is October 3, when the consultation period closes. Until SEBI issues a final framework, traders should treat the two settlement methods and the accompanying auction changes as proposals rather than confirmed rules.
Source: Reuters, September 12, 2026.
