The Securities and Exchange Board of India’s (SEBI) Secondary Market Advisory Committee (SMAC) has reportedly favoured retaining the existing 30-minute volume-weighted average price (VWAP) methodology for calculating the settlement prices of index and single-stock derivatives on expiry days. The recommendation would delay an immediate move to a blended formula that incorporates prices discovered during the closing auction session (CAS), following concerns raised by traders and other market participants.
Under the recommended approach, derivatives settlement prices would continue to be calculated using trades executed between 3:00 pm and 3:30 pm during the continuous trading session. The committee has also reportedly favoured changes to market timings and certain auction-related procedures. However, these are recommendations reported by sources, and SEBI’s final decision will depend on its review of stakeholder feedback and the subsequent regulatory circular.
Key Takeaways
- Existing method favoured: SEBI’s advisory panel has reportedly backed retaining the 30-minute VWAP method for derivatives expiry settlement.
- Blended formula deferred: The proposal to combine continuous-session trading with closing auction prices would not be introduced immediately under the recommendation.
- Proposed settlement window: The existing approach uses trades executed between 3:00 pm and 3:30 pm.
- CAS remains relevant: The closing auction session can still determine closing prices for eligible cash-market stocks, even if derivatives settlement continues to use the earlier VWAP method.
- Market timing changes: The panel has reportedly favoured continuing regular trading in CAS stocks until 3:30 pm, followed by the auction, with derivatives trading until 3:45 pm.
- Final decision pending: SEBI has received more than 20,000 responses to its consultation and must finalise the framework through its official decision-making process.
SEBI Panel Favours Retaining the 30-Minute VWAP Method
The Secondary Market Advisory Committee has reportedly recommended continuing with the existing VWAP-based approach for derivatives settlement rather than immediately adopting a blended formula linked to the closing auction session.
The recommendation follows SEBI’s September 12 consultation paper, which sought public feedback on settlement methodologies, closing auction procedures and market timings after the new CAS framework was introduced for stocks in the futures and options (F&O) segment.
Under the current 30-minute VWAP approach, the settlement price is calculated using trades executed between 3:00 pm and 3:30 pm during the continuous trading session. The method uses both the prices and volumes of eligible trades to calculate a weighted average.
The committee’s reported preference reflects concerns about incorporating auction prices into derivatives settlement before the auction mechanism has developed sufficient liquidity and predictable price-discovery characteristics.
Market participants have argued that retaining the existing method for an interim period would give exchanges and traders more time to evaluate the closing auction mechanism. It would also preserve a familiar settlement process while SEBI assesses the effect of CAS on market liquidity and volatility.
The recommendation does not mean that SEBI has formally cancelled the blended methodology. The final outcome depends on the regulator’s decision and the terms of its forthcoming circular.
What Is VWAP and Why Does It Matter for Derivatives?
Volume-weighted average price, or VWAP, is a calculation that gives greater weight to prices at which larger quantities of a security have traded.
Unlike a simple arithmetic average of trade prices, VWAP considers the volume associated with each transaction. This makes it a commonly used benchmark for assessing trading activity and execution prices.
In the context of derivatives expiry, the settlement price helps determine the final value used to calculate the cash difference between the contract’s settlement level and the relevant position’s value, subject to the contract’s rules.
For index derivatives, the settlement process relies on the applicable index-level methodology. For single-stock derivatives, the relevant underlying security and prescribed exchange rules determine the settlement calculation.
A change in the settlement methodology can affect traders, arbitrageurs and investors holding hedged positions. If the price used to settle a derivative differs from the price assumed when the position was constructed, the resulting difference can affect the final profit or loss.
This is why a predictable, clearly defined settlement process matters to participants who use derivatives to hedge portfolios or manage exposure near expiry.
What Is the Closing Auction Session?
The closing auction session is a mechanism designed to bring together buy and sell orders near the end of the trading day to determine a closing price through an auction process.
SEBI introduced CAS for stocks with available futures and options contracts from August 3, 2026. The framework was intended to improve closing-price discovery by aggregating market interest during a defined auction window.
Under the mechanism, eligible orders are collected and matched according to the auction’s rules. The process can help concentrate liquidity at the close and establish a price based on the balance of buy and sell interest.
However, the introduction of CAS raised concerns among market participants about price movements during the auction and the relationship between cash-market closing prices and derivatives settlement.
These concerns prompted SEBI to review how the closing auction should interact with the settlement of index and single-stock derivatives on expiry days.
Importantly, retaining VWAP for derivatives settlement would not necessarily eliminate CAS from the cash market. The two mechanisms serve related but distinct purposes: one establishes a closing price through an auction, while the other calculates a weighted average of trades during a specified continuous-trading window.
Existing VWAP Versus the Proposed Blended Formula
SEBI’s consultation paper presented two broad alternatives for calculating derivatives settlement prices on expiry days.
The first was to retain the continuous-trading-session VWAP as an interim arrangement. The second was to introduce a blended methodology that incorporates the VWAP of trades during the final 30 minutes of continuous trading and prices discovered during the subsequent 10-minute closing auction.
Comparison of the two settlement methods
| Feature | Existing 30-minute VWAP | Proposed blended VWAP |
|---|---|---|
| Continuous trading window | 3:00 pm to 3:30 pm | 3:00 pm to 3:30 pm |
| Closing auction component | Excluded from the settlement calculation | Incorporated into the calculation |
| Price input | Trades during the final 30 minutes of continuous trading | Continuous-session trades plus eligible auction prices |
| Main consideration | Familiarity and a defined calculation window | Incorporating auction-based price discovery |
| Reported committee preference | Retain as an interim method | Defer an immediate transition |
| Regulatory status | Subject to SEBI’s final decision and applicable rules | Proposed in the consultation paper; not confirmed as the immediate approach |
The blended methodology was intended to reflect both continuous trading and the auction-based closing process. However, traders raised concerns about how the relative contribution of each component would affect the final settlement price and whether the auction would have sufficient liquidity.
The reported committee recommendation favours preserving the existing calculation method for at least a year before reconsidering a transition. That would provide time to evaluate how the closing auction performs and whether its liquidity is sufficient for derivatives settlement.
Why Traders Raised Concerns About the Blended Formula
The central concern is that a blended settlement price would depend partly on the activity and price discovery occurring during the closing auction.
During continuous trading, participants can observe completed trades and use that information when managing their positions. A blended formula introduces a second pricing component whose final contribution may depend on activity during the auction.
Market participants have argued that this could complicate hedging and arbitrage strategies, particularly for traders who need to manage cash-market holdings and derivatives positions together.
The Futures Industry Association and other participants have raised concerns about the predictability of the blended calculation and the liquidity available during CAS. Their feedback has supported retaining the existing VWAP method until the auction mechanism is better established.
Another concern is the potential for sharp price movements near expiry. If the closing auction produces a price that differs substantially from the continuous-session market, incorporating that price into settlement could affect derivatives positions in ways that traders may find difficult to anticipate.
These concerns do not establish that the blended methodology would necessarily cause manipulation or instability. They explain why market participants have asked SEBI to consider liquidity, transparency and implementation risks before changing the settlement framework.
Proposed Changes to Market Timings
The committee has also reportedly favoured adjustments to the timetable for stocks covered by CAS.
Under the reported recommendation, continuous trading in eligible cash-market stocks would continue until 3:30 pm. After a one-minute transition period, the closing auction would run from 3:31 pm to 3:40 pm. Derivatives trading would continue until 3:45 pm, providing an additional five-minute window after the auction concludes.
Reported proposed timetable
| Market activity | Proposed timing |
|---|---|
| Continuous trading in CAS stocks | Until 3:30 pm |
| Transition period | 3:30 pm to 3:31 pm |
| Closing auction session | 3:31 pm to 3:40 pm |
| Derivatives trading | Until 3:45 pm |
The proposed schedule is intended to create a more structured transition between regular trading and the auction while allowing derivatives participants additional time after the auction concludes.
These timings are based on the committee’s reported preference and should not be treated as a confirmed exchange schedule until SEBI issues its final directions and the exchanges publish the applicable implementation details.
Indicative Equilibrium Prices and Market Orders Remain Important Issues
The consultation also covered how indicative price information should be displayed during the closing auction and how market orders should be handled.
An indicative equilibrium price (IEP) is a provisional price at which eligible buy and sell orders could potentially match under the auction’s rules. It is not the same as a final executed closing price.
The committee has reportedly favoured continuing the display of the stock-level IEP during CAS. The treatment of indicative index values and the handling of market orders have also attracted attention because auction information can influence trading decisions before the final price is established.
Market orders are particularly important in an auction environment because they do not specify a limit price in the same way as limit orders. Their execution depends on the applicable rules and the available liquidity.
Concerns about large orders being placed and subsequently cancelled have also prompted calls for safeguards against potential manipulation. SEBI’s final framework will need to balance transparent price discovery with appropriate controls over order placement and execution.
On iceberg orders, which allow traders to display only part of a larger order, the panel has reportedly favoured options for orders to remain valid until either 3:30 pm or 3:40 pm. The final treatment will depend on SEBI’s formal directions.
More Than 20,000 Responses Complicate the Regulatory Decision
SEBI received more than 20,000 responses to its consultation paper, according to recent reports. The feedback highlights the level of interest in the changes among traders, brokers and other market participants.
The consultation covered more than just the derivatives settlement formula. It also addressed the design and operation of the closing auction, market timings, the display of indicative prices and the treatment of certain orders.
The regulator must consider these issues together because changing one part of the framework can affect the way cash-market and derivatives participants interact during the final minutes of trading.
SEBI Chairman Tuhin Kanta Pandey has said the regulator expects to issue new CAS guidelines shortly after reviewing the feedback. Until the final circular is published, the committee’s reported preferences should be understood as recommendations rather than binding rules.
The Bigger Picture
The debate over VWAP and CAS reflects a broader regulatory challenge: improving closing-price discovery without creating unnecessary uncertainty for participants who use derivatives to manage risk.
A closing auction can concentrate liquidity and help establish a closing price, but its usefulness depends on participation, order quality and the reliability of the resulting price. Incorporating auction prices into derivatives settlement therefore requires careful consideration of how the auction behaves under different market conditions.
Retaining the 30-minute VWAP method as an interim arrangement would give the regulator additional time to assess the new mechanism. The eventual decision could influence the settlement process used by index and single-stock derivatives, as well as the operational choices of traders and institutions that rely on hedging and arbitrage.
What Happens Next?
The next major step is SEBI’s final circular setting out the revised closing auction and derivatives settlement framework. Traders, brokers and exchanges will need to examine the final methodology, effective date, market timings and treatment of different order types before changing their trading or risk-management processes.
Market participants will also watch whether SEBI retains the existing 30-minute VWAP method for an interim period and what conditions, if any, it establishes before moving to a blended formula. The regulatory decision will determine whether the reported committee recommendations become formal rules and how the closing auction mechanism develops in the months ahead.
Frequently Asked Questions
1. What is SEBI’s panel recommending for derivatives expiry settlement?
The Secondary Market Advisory Committee has reportedly favoured retaining the existing 30-minute VWAP methodology for expiry-day settlement of index and single-stock derivatives instead of immediately adopting the blended formula proposed in the consultation paper.
2. What is the 30-minute VWAP method?
It calculates the volume-weighted average price of eligible trades executed between 3:00 pm and 3:30 pm during the continuous trading session. The calculation gives greater weight to prices at which larger quantities were traded.
3. Does retaining VWAP mean the closing auction session will be cancelled?
No. The reported recommendation concerns the methodology used to settle derivatives. CAS can continue to operate for determining closing prices of eligible cash-market stocks, subject to SEBI’s final rules.
4. When will the new SEBI rules become effective?
The effective date depends on SEBI’s final circular and the implementation instructions issued by the exchanges. The committee’s reported recommendations alone do not establish a binding implementation date.
Sources
- Moneycontrol — “SEBI panel backs 30-minute VWAP for expiry settlement, puts CAS-linked formula on hold.”
- Moneycontrol — SEBI calls SMAC meeting to discuss CAS feedback.
- Business Standard — SEBI CAS review draws over 20,000 responses; traders resist VWAP shift.
- SEBI — Consultation paper on closing auction session, market timings and derivatives settlement methodologies.
- Financial Express — SEBI chairman says new CAS guidelines expected shortly.
This article reflects information available as of October 15, 2026. Committee recommendations are distinguished from final SEBI rules.
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