Sebi to Revise CAS and Update Derivative Trading Methodology
Markets regulator Sebi announced on Thursday that it will revise the settlement price mechanism for derivatives contracts used in the Closing Auction Session (CAS). This decision follows the rollout of CAS on August 3, which has led to notable market volatility and discrepancies in closing prices between exchanges.
Sebi plans to release a consultation paper to outline proposed changes to the mechanism. The introduction of CAS aimed to enhance closing price discovery, a practice commonly adopted globally. Previously, Sebi utilized the Volume-weighted Average Price (V-WAP) system for all stocks traded in the derivatives segment.
In the past month, Sebi chairman Tuhin Kanta Pandey indicated that while the regulator would not overhaul the CAS process, adjustments could be made based on trading data. The regulator faced challenges during the initial implementation, including a penalty imposed on Copthall, a JP Morgan entity, and Mansi Broking for manipulating sensex levels during CAS on August 13. Subsequent trading days also experienced significant price volatility, particularly on expiry days for weekly and monthly futures and options contracts.
Sebi’s release emphasized that the CAS framework was developed after extensive consultations with stakeholders, including stock exchanges and brokers. The regulator has been actively monitoring CAS’s performance and its market impact, gathering feedback from various participants through multiple channels. A key concern raised pertains to how settlement prices for derivative contracts are determined at expiry based on CAS closing prices.
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