SEBI will launch a consultation process to potentially delink the settlement of expiring Futures and Options contracts from the recently introduced Closing Auction Session. The review follows concerns over increased market volatility and execution difficulties since the system's rollout in August 2026. This move aims to stabilize closing prices and address liquidity gaps that have impacted both institutional and retail investors.
The Securities and Exchange Board of India (SEBI) has stepped in to address growing concerns regarding the settlement of derivative contracts. The regulator announced on September 3, 2026, that it will review the current methodology which links the settlement of expiring Futures and Options (F&O) contracts to the Closing Auction Session. This decision follows weeks of market volatility and feedback from participants regarding the challenges posed by the new system, which was implemented in early August 2026.
Since the rollout of the Closing Auction Session, many market participants have reported erratic price swings during the final minutes of trading. The primary issue stems from the fact that the cash market is now required to absorb the large order volumes associated with derivative contract settlements. This structural mismatch has led to liquidity gaps, making it difficult for traders to execute orders efficiently and causing index divergences between exchanges. For many traders, the price distortion has made dynamic delta hedging—a strategy used to manage risk—nearly impossible during the auction window.
For institutional investors, such as mutual funds and passive funds, this volatility presents significant operational risks. Because their performance is often measured against the official closing price, any discrepancy between that price and their actual execution capability can lead to a tracking error. This has caused frustration among large investors who rely on predictable closing prices to manage their portfolios effectively.
The market’s reaction to the regulator's intervention has been notable. Following the announcement on September 3, brokerage stocks, including Angel One, witnessed positive price movement on September 4, 2026, as investors assessed the potential for more stable trading conditions. Improved settlement stability could theoretically enhance market participation and reduce the risk of erratic price movements that have plagued recent monthly expiries.
SEBI is expected to release a formal consultation paper within the next week, which will outline proposed changes to the settlement process. Investors and market participants are now waiting for these specific proposals, as they will determine how the regulator plans to balance the need for an orderly market close with the requirements of the derivatives segment. The upcoming consultation paper will be a key monitorable to understand if the current system will undergo a structural overhaul or be modified to better accommodate expiration-day volumes.