SEBI to Review Derivatives Settlement Pricing Amid Market Stability Concerns

India’s Securities and Exchange Board (SEBI) announced on Thursday that it will review the methodology for calculating settlement prices for derivatives contracts. The move comes in response to feedback from market participants and concerns about instability linked to the recently implemented closing auction session in the equity cash market.

Regulator Responds to Market Feedback

SEBI stated it has received feedback from various stakeholders regarding the new closing auction session, which was introduced on August 3 to establish the closing prices for securities. The regulator acknowledged that several issues have been identified since its implementation.

In response, SEBI plans to release a discussion paper detailing proposed changes to the settlement price methodology within one week. This initiative aims to address the problems that have emerged and refine the price discovery mechanism for the derivatives market.

Closing Auction Session Issues

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The review was prompted by several specific problems that have raised concerns about market integrity and stability, particularly on days when benchmark derivatives contracts expire. Market participants have observed sharp and unusual price movements during the new closing auction window.

Key issues identified by stakeholders include:

• Divergent index closing levels across different stock exchanges.
• Unstable and erratic options pricing during the closing session.
• Concerns about the potential for market manipulation, especially on expiry days.

For investors and traders, an accurate and stable settlement price is crucial for the fair valuation and settlement of futures and options contracts. The current issues can lead to unexpected gains or losses, undermining confidence in the market's pricing mechanisms.