SEBI Reopens How F&O Settles After the Closing Auction

SEBI said on September 3 it will consult within a week on how F&O contracts settle on expiry after the Closing Auction Session’s first month.

The 20-minute cash auction remains. The live question is whether that print should still pay out the derivatives book.

SEBI Opens the Expiry Formula and Leaves CAS Running

The regulator said it had watched the Closing Auction Session, or CAS, through its first month and taken comments from exchanges, brokers, proprietary desks, software vendors, mutual funds, industry groups and foreign portfolio investors. Feedback also arrived over social media and other public channels.

“Among the issues raised, a significant area of feedback relates to the determination of settlement prices of derivative contracts on expiry based on the closing price determined through CAS,” SEBI said in its September 3 statement. It added that a consultation paper on possible changes would follow in about a week. The paper had not been published by September 4, and the statement did not spell out a new formula.

That split matters because the chairperson had already drawn a line around the auction itself. After the first monthly expiry, Tuhin Kanta Pandey said the session was not being rewritten.

We are not seeing any changes right now to CAS, and the system is running as it is. Participation will increase, and everyone, brokers, will enable it in their apps.

Tuhin Kanta Pandey, SEBI Chairperson, at NSE Clearing’s 30th anniversary

Six days later the board kept that line and opened a narrower file: the expiry settlement method that currently rides on the auction close. Venkatachalam Shunmugam of MCQube called the September 3 move a signal that CAS is here to stay, and said a tighter band than 3% or a special window for contracts expiring that day could still be on the table.

A Month of Closes That Left the Tape Behind

CAS went live on August 3, 2026 for cash stocks that have derivatives. Continuous trading in those names stops at 3:15 p.m. The auction then runs to 3:35 p.m. Index and stock derivatives keep trading until 3:40 p.m. Non-F&O stocks still trade until 3:30 p.m., and their close remains a last-30-minute volume-weighted average.

The first weekly tests showed how far an auction print can travel from the last continuous trade. On August 4 the Nifty was at 24,463 at 3:20 p.m. and settled at 24,615, a 152-point jump inside the new window. Rajesh Palviya, head of research at Axis Securities, said the Nifty 24,600 put, still above Rs 100 as late as 3:24 p.m., finished worthless, while a 24,500 weekly call near Rs 30 around 3:15 p.m. rose about five times into settlement.

After those first weekly tests, options desks already recut closing-auction risk by cutting size and widening hedges into 3:15 p.m. Tanmay Kurtkoti, founder of QCAlpha Advisors, said his firm cut expiry-day volumes by 70% to 75%, especially in the auction window. “The major issue is opacity,” he said. “I don’t know whether the trades that I push during CAS will get executed.”

THE FIRST MONTH OF THE CLOSING AUCTION

1. August 3, 2026: CAS starts for F&O stocks in the cash market, with the auction close also used for derivative expiry settlement.
2. August 4, 2026: Nifty jumps from 24,463 at 3:20 p.m. to a 24,615 settlement on a weekly expiry.
3. August 13, 2026: Sensex weekly expiry. SEBI later alleges two entities pushed the auction to help options due that day.
4. August 19, 2026: An ex-parte interim order names Copthall Mauritius Investment and Mansi Share and Stock Broking and impounds alleged gains.
5. August 27, 2026: First monthly expiry under CAS. Sensex falls from about 77,200 to 74,983 in the auction, then closes at 76,934.
6. August 28, 2026: Pandey says the auction itself is not being changed.
7. September 3, 2026: SEBI says it will consult on expiry settlement, on another BSE weekly expiry that saw a drop of about 2,100 points in the first minutes of the auction.

On August 27, Reliance Industries, the heaviest Sensex name, moved from Rs 1,289 to Rs 1,250 inside the auction, a 3% swing against the band, before closing at Rs 1,286. Surat trader Rohit Tiwari said a Sensex monthly-options loss that was about Rs 50,000 before the auction ballooned to Rs 3,88,000 once the indicative close had plunged.

How Derivative Settlement Got Wired to the Cash Auction

SEBI did not bolt F&O onto CAS as an afterthought. The January 16 circular that wired settlement to the new close said a fair closing price matters because it is the reference for derivatives settlement, index computation and mutual fund NAVs. Two public papers, on December 5, 2024 and August 22, 2025, preceded that circular.

Under the circular, the index expiry price is the closing price of the underlying index, and that index close is built from the closing prices of its constituents. Stock derivatives settle at a price clearing corporations compute as the volume-weighted average of the stock’s cash closing prices across exchanges. For CAS names, that cash close is the auction equilibrium when one is found, or the 3:00 p.m. to 3:15 p.m. reference VWAP if the auction does not discover a price.

WHERE THE CLOCK STOPS AND WHAT PRICE PAYS

The BSE guidelines for the 20-minute auction set the same skeleton: a 5-minute transition from 3:15 p.m., order entry from 3:20 p.m., a random close between 3:28 p.m. and 3:30 p.m., then matching. Only limit and market orders are allowed. Stop-loss and iceberg orders are not. The price band is +/- 3% from the reference VWAP. Stock futures use a matching band from 3:15 p.m. to 3:40 p.m.

NSE rules on CAS order handling add that unexecuted continuous-session limit orders roll into the auction unless they are stop-loss, iceberg, or outside the band, and that those carried orders keep time priority over fresh auction limits. That is the plumbing Kurtkoti is describing when he says he cannot be sure a hedge sent into CAS will fill.

Unhooking the Print Would Change Who Shows Up

If expiry no longer pays on the auction close, the people with the most leverage over a 15-minute print lose a reason to stand in that queue. Weekly index options, which can go from a few rupees to worthless on a 150-point move, are the bid that made the new close a fight. Take that bid away and the auction still has a job, but it is a quieter one: giving index funds and other cash accounts a single close.

A second official price would also split the market. Mutual fund NAVs and cash index levels would still mark to CAS. The F&O book would mark to something else, which is the old last-30-minute idea in a new wrapper, or a theoretical close, or a shorter VWAP. Basis traders who now fade the gap between the 3:15 p.m. tape and the auction would have less to do on ordinary Tuesdays and Thursdays. The remaining flow would be the flow that always wanted the close: passive rebalance, cash hedges, and any desk still willing to take auction fill risk.

THE FIXES ALREADY IN CIRCULATION

• Delink expiry: Keep CAS as the cash close and NAV print, and set F&O final settlement on a different formula so a thin auction cannot reprice the whole options chain.
• Tighter band: Cut the +/- 3% collar that let Sensex names travel the full limit in a few minutes.
• One auction: Run a common CAS for NSE and BSE so the two index closes cannot diverge on the same stocks.
• No modifications: Freeze order changes once the match window starts, reducing last-second cancels that yank the indicative close.
• Expiry-only session: Build a separate window for contracts that die that day, instead of making every cash close carry weekly options risk.

Those are staff-level ideas, not SEBI’s paper. The September 3 statement only promised a consultation. Shunmugam’s tighter-band and special-session comments sit in that same unfinished file. A delink is the cleanest way to keep Pandey’s promise that CAS stays, and it is also the change that would drain the leveraged demand the auction was just beginning to concentrate.

What the Copthall File Shows About a Thin Auction

The coupling SEBI is now reviewing is the same coupling the surveillance file used. On August 13, a Sensex weekly expiry, the index’s reference price at 3:15 p.m. was 77,829.60. The auction close came in at 78,079.96. SEBI said the settlement price of Sensex options that day was based on the CAS index close.

The August 19 interim order on the Sensex auction names Copthall Mauritius Investment Limited and Mansi Share and Stock Broking Private Limited. SEBI alleged they used aggressive cash orders in Sensex stocks during CAS to move the indicative equilibrium price and help expiry-day options. The order records three Sensex spikes in the auction, including a 362-point jump in two seconds, a 133-point move in 12 seconds, and a 405-point move in 28 seconds.

SEBI calculated alleged wrongful gains of Rs 2.96 crore for Copthall and Rs 71.64 lakh for Mansi, a combined Rs 3.67 crore, and ordered those sums impounded in liened deposits. The regulator said a manipulated CAS close hits F&O settlement and mutual fund NAVs, not only the cash tape. That is the design working as advertised, and it is why a thin, cancellable auction is a surveillance problem as well as a trading one.

Low participation makes that file easier to open. If only a handful of bids set the equilibrium, a 3% market order in a heavyweight stock can walk the indicative index around. Prop desks stepping back, as QCAlpha did, removes the very flow that would otherwise fade an off-market indicative. The remaining book is then more useful to anyone who needs the print, for hedging or for something less clean.

Passive Funds Still Need a Close on Rebalance Days

Unhooking expiry would not empty the auction on every session. SEBI built CAS partly so passive funds could trade at the close and cut tracking error against global benchmarks. That demand showed up on August 31, when NSE recorded $4.1 billion of closing-auction trades during MSCI rebalancing, against an average of about $128 million on other days, more than 30 times the ordinary print.

Those are cash and index-weight flows. They will still want a single, executable close if F&O settles somewhere else. Mutual funds will still need a NAV. The cash index will still need constituent closes. The second-order effect is concentrated on weekly and monthly expiry afternoons, when the options chain is the loudest customer of the last 20 minutes. Take that customer out and CAS starts to look like the London or Hong Kong close it was copied from: a place for size, not a place to expire a one-day put.

The cost of keeping both jobs in one print is the month just logged. Indicative Sensex values swung thousands of points inside the band. Nifty and Sensex closes diverged. Option premiums that looked dead at 3:15 p.m. came back to life, or vanished, on a cash auction the F&O tape could not fully hedge because the underlying stock had already stopped continuous trading.

The Consultation Paper Still Treats CAS as Permanent

SEBI has not said it will restore the old last-30-minute VWAP as the cash close for F&O stocks. The September 3 statement is narrower than the August trader complaints. Brokers wanted the auction rewritten or delayed. The board is offering a paper on the settlement method that currently uses that auction. Pre-open timing changes tied to the same January circular are still due on September 7, which is a separate clock and has not been pulled.

Read together, the month looks like this. CAS was sold as one close for cash, NAVs, indices and expiry. The first 31 days showed that expiry is the stress test the other three uses do not need to fail. A consultation that delinks the F&O print would leave the auction standing for the funds that asked for it, and would stop asking a 20-minute cash match to price a national options market after the underlying has gone dark.

The paper SEBI promised in about a week from September 3 is where that choice has to be written down. Until it is, expiry still pays on the auction close, and the 3:15 p.m. tape is still only a reference.

Disclaimer: This article is news reporting and analysis of a SEBI consultation process and related market-structure facts. It is informational only and is not investment advice, trading advice, or a recommendation to buy, sell, or hold any security, futures contract, or option. Readers who trade or invest should consult a SEBI-registered investment adviser or their broker before changing expiry-day hedges, auction orders, or derivatives positions. Figures, case status, session times and the unpublished consultation terms reflect the public statements and circulars cited here as of the dates on those documents and may change when the paper is issued or when exchanges update their SOPs.