Taming the Volatility: Inside SEBI’s Proposed Overhaul of India’s Closing Auction Session

Jyoti Rathi - Kolkata Bureau Sep 12, 2026 1,350 Views

SEBI has proposed key modifications to India's closing auction session and derivatives settlement rules to mitigate post-session price swings. The framework introduces alternative expiry-day pricing models, tighter order cancellation limits, and revised market timings, with public comments open until October 2026.

SEBI Proposes Changes to Closing Auction, Derivatives Settlement

Market regulator floats crucial modifications to closing auction rules and expiry-day derivatives settlement structures to curb price volatility.

The Securities and Exchange Board of India (SEBI) issued a comprehensive consultation paper on September 12, 2026, proposing major changes to the recently introduced Closing Auction Session (CAS) and equity derivatives settlement framework. Following feedback from stock exchanges, institutional investors, and trading members regarding market volatility, the regulatory review seeks to fine-tune market timings, restrict order cancellations, and introduce alternative expiry-day settlement methodologies for index and single-stock derivatives.

Revamping Derivatives Settlement and Market Timings

The regulatory proposals address the interaction between the cash equity segment and derivatives trading on expiry days. To determine stable expiry-day settlement prices, SEBI has put forward two distinct alternatives. Under the first option (Blended VWAP), settlement prices would combine trades executed during the last 30 minutes of continuous trading with the 10-minute CAS period based on actual traded value. Under the second option, the market would temporarily revert to the traditional Volume Weighted Average Price (VWAP) methodology derived exclusively from the final 30 minutes of continuous trading, excluding CAS transactions until market participants gain further familiarity.

Additionally, SEBI proposed two alternative schedules for market operations. Option A allows continuous trading for CAS-eligible stocks to run until 3:30 PM, followed by a one-minute transition, the CAS from 3:31 PM to 3:40 PM, and post-CAS derivatives trading until 3:45 PM. Option B retains the existing 3:15 PM cut-off for continuous trading, runs CAS from 3:15 PM to 3:25 PM, and closes derivatives trading at 3:30 PM. Both options shorten the transition interval to one minute and reduce the post-CAS derivatives window from ten minutes to five minutes.

Tighter Order Controls and Transparency Measures

To safeguard price discovery during the auction window, SEBI proposed targeted restrictions on order modifications. While the existing $\pm 3\%$ price band remains unchanged, orders placed more than 1% away from the reference price cannot be cancelled during CAS, though modifications in a price-improving direction remain permissible. Furthermore, unexecuted Iceberg orders from continuous trading can transition into the auction book as normal limit orders to enhance liquidity depth.

According to regulatory statements released by the Securities and Exchange Board of India (SEBI) and market infrastructure filings collated through the National Stock Exchange of India (NSE), public comments on the seven proposed modifications have been invited through October 3, 2026.

"According to officials, reviewing the initial operational experience of the closing auction mechanism is vital for maintaining market integrity and balancing efficient price discovery with risk management."

Key Facts at a Glance

Regulatory Review: SEBI floated seven key proposals to modify the month-old Closing Auction Session (CAS) and derivatives settlement rules.
Settlement Options: Two alternatives introduced for expiry-day derivatives settlement, including a blended VWAP model and a potential return to traditional VWAP.
Order Restrictions: Cancellations for orders placed beyond 1% of the reference price during CAS face strict limitations.
Public Consultation: Market participants and stakeholders can submit feedback on the proposals until October 3, 2026.

Frequently Asked Questions

Why is SEBI proposing changes to the Closing Auction Session? The review addresses market feedback regarding price volatility and the interaction between cash and derivatives segments on expiry days.
What are the proposed options for derivatives settlement? SEBI suggested either a blended VWAP incorporating both continuous trading and CAS data or temporarily reverting to the traditional 30-minute VWAP method.
How are order cancellations restricted during CAS? Orders placed more than 1% away from the reference price cannot be cancelled, though price-improving modifications are allowed.
Where can official consultation documents be reviewed? Complete details and draft papers are hosted on the Securities and Exchange Board of India (SEBI) portal.