(Bloomberg) — India’s markets regulator proposed sweeping changes to the closing auction system, including a possible return to the previous method for settling derivatives on expiry days, after sharp price swings and liquidity concerns emerged around the month-old mechanism.
The Securities and Exchange Board of India planned amendments include derivatives settlement price, auction trading time, and order cancellations, according to a discussion paper released Saturday.
The biggest adjustments being considered relate to the settlement price for futures and options contracts and the timing of the closing auction window.
The plan cuts the auction window to 10 minutes from the current 20 minutes. The regulator has also sought feedback on starting the auction-based mechanism after the close of regular trading at 3:30 p.m. in Mumbai, rather than the current start time of 3:15 p.m., it said in the paper.
Under both the new options, trading derivatives contracts will conclude just five minutes after the close of the auction.
The review follows a series of volatile trading sessions, including during last month’s MSCI Inc. index rebalancing and Thursday’s derivatives expiry on BSE Ltd. The swings have raised concerns about the mechanism, including its potential for misuse, and drawn criticism from traders and proprietary trading firms.
The other consequential proposal related to the settlement price of the futures and options contracts for more than 200 stocks. The regulator suggests two methods for calculating expiry settlement prices. It proposes a blended volume-weighted average price of the final 30 minutes of continuous trading and the 10-minute auction. Its second option allows the previous method of using only VWAP of final 30-minute of continuous-trading.
“Providing two options for the settlement of contracts is important, as it gives market participants an opportunity to understand the nuances and implications of both approaches,” said Tejas Shah, head of equity derivatives at Equirus Securities Pvt. “The regulator is taking a step in the right direction,” he said.
The regulator has sought public comments on its proposals by Oct. 3, after which it will still need time to consider the feedback before making any final revisions to the unpopular auction system.
(Updates with analyst comment and more details.)
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