SEBI to address concerns over settlement price for derivatives on expiry days, says Chairman

SEBI chairman Tuhin Kanta Pandey on Tuesday said the capital markets regulator intends to address concerns over the settlement price for derivatives on expiry days and other related issues.
To address market participants’ concerns, SEBI floated a consultation paper earlier this month seeking public comments on the proposed changes to the methodology for determining expiry-day settlement prices of index and single-stock derivatives.

The proposals include delinking derivatives’ settlement prices from the cash-market closing price, discontinuing live indicative index values during the CAS and making orders placed beyond the one per cent band more binding.
“Having successfully established the Closing Auction Session as an important market structure reform, we intend to address concerns in respect of settlement price for derivatives on expiry days and other related issues. A consultation paper has already been issued inviting public comment,” Pandey said at the 11th JP Morgan India Conference.

The regulator proposed two options for determining the settlement price. Under the first, called Blended VWAP, the settlement price would be based on transactions executed during the last 30 minutes of the Continuous Trading Session (CTS) and the 10-minute CAS. The contribution of each period would be based on its actual traded value, with no fixed weight assigned to either.

Under the second option, SEBI proposed continuing with the existing CTS Volume weighted average price (VWAP) methodology, under which only trades executed during the last 30 minutes of CTS would be considered.
The regulator said the CTS VWAP could be retained as an interim methodology to provide continuity and allow market participants more time to familiarise themselves with CAS. The methodology could subsequently transition to the blended VWAP after at least one year, subject to adequate liquidity and participation in CAS and an assessment of its functioning across different market conditions.

The consultation paper issued on September 12 followed feedback from market participants on using the CAS-determined closing price to settle derivative contracts on expiry.
Determination of derivative settlement prices based on the closing price arrived at through CAS was among the significant areas of feedback received by SEBI.

     CAS was introduced in the equity cash segment for stocks with derivative contracts from August 3 to facilitate efficient and transparent price discovery of closing prices.

     Also, the SEBI chief said the regulator is consulting on net settlement of funds for mutual fund schemes in the cash market, while retaining appropriate safeguards. “We will also continue to deepen the cash market by widening participation, improving securities borrowing and lending, and supporting hedging and arbitrage. The objective is better liquidity, stronger price discovery and more efficient interaction between the cash and derivatives markets.”

     He said that corporate bonds need the next layer of depth and participation. The work is underway to develop a comprehensive market-making framework covering liquidity, market infrastructure and repo access.
     The regulator is also consulting on Fixed Income Channel Partners to widen distribution through regulated online bond platforms, he added.