SEBI is reverting to the volume-weighted average price (VWAP) method for derivatives settlement starting December 7, ending the recent Closing Auction Session policy. The change follows significant market volatility and a sharp drop in trading volumes, which discouraged institutional participation on expiry days. By returning to the previous settlement standard, regulators aim to reduce erratic price swings and stabilize activity during closing hours.
The Securities and Exchange Board of India (SEBI) has officially decided to reverse the recent Closing Auction Session (CAS) mechanism for derivative contracts. Starting December 7, the market will revert to the volume-weighted average price (VWAP) method for settlement on expiry days. This policy shift follows significant concerns over market instability and erratic price movements observed during the closing window since the mechanism was introduced in August.
The Closing Auction Session, which debuted on August 3, was originally intended to improve the price discovery process at the close of trading. However, the system frequently caused sudden and sharp fluctuations in indices. A notable example occurred on October 22, when the benchmark Sensex plunged nearly 2% within a two-minute window during the indicative close. Such events created a high level of unpredictability that worried both institutional and retail market participants.
These unpredictable swings led to a noticeable decline in market engagement. Many traders and institutions became reluctant to participate in expiry-day trading to avoid being caught in the volatility of the auction window. Consequently, total derivatives turnover on the National Stock Exchange of India dropped by 19.2% month-on-month in August, reflecting the reduced appetite for risk in an unstable closing environment.
Analysts have welcomed the regulatory pivot, noting that reverting to the familiar VWAP method—which calculates prices based on the final 30 minutes of regular trading—should serve as a cooling measure for expiry-day volatility. The return to traditional settlement is expected to help normalize trading patterns and potentially draw volumes back to levels seen before the August rule changes.
For investors and traders, the key monitorable now is the pace at which liquidity and trading volumes recover. While the regulatory adjustment aims to remove the source of recent instability, the broader market environment remains sensitive to changes in transaction tax structures and ongoing regulatory updates. The effectiveness of this change in restoring steady, predictable closing sessions will become clearer once the new settlement process takes effect in December.