The SEBI Expiry Day Overhaul has emerged as a major development for India’s derivatives market after the Securities and Exchange Board of India proposed changes to the Closing Auction Session (CAS), expiry-day settlement methodology, market timings and order-handling rules. The regulator’s latest consultation comes after the newly introduced auction mechanism triggered sharp price movements and raised concerns about liquidity and possible manipulation during expiry sessions.
The SEBI Expiry Day Overhaul is aimed at addressing some of the problems seen since the Closing Auction Session was introduced on August 3, 2026. CAS was brought in to determine official closing prices through an auction instead of relying on the volume-weighted average price of trades during the final 30 minutes of continuous trading. While the change was intended to improve price discovery and bring Indian markets closer to global practices, the initial weeks exposed challenges around liquidity and expiry-day volatility.
Under the proposed SEBI Expiry Day Overhaul, the regulator has presented two possible approaches for determining settlement prices of index and single-stock derivative contracts on expiry days. The first option is a blended VWAP methodology, combining trades from the final 30 minutes of the Continuous Trading Session with prices discovered during the 10-minute Closing Auction Session. The weighting would depend on the traded value in the two periods.
The second option under the SEBI Expiry Day Overhaul would retain the existing VWAP-based settlement methodology initially. Under this approach, derivative settlement prices would continue to be calculated using trades during the final 30 minutes of continuous trading. SEBI has proposed that this could remain in place for at least a year while the regulator assesses CAS liquidity and market participants’ familiarity with the auction mechanism.
The proposed changes are significant because expiry prices have a direct impact on the final value of futures and options contracts. A sharp movement in the underlying index or stock near the close can translate into large gains or losses for derivatives traders. The SEBI Expiry Day Overhaul is therefore intended to make the settlement process more predictable and reduce the possibility that a relatively illiquid closing period could disproportionately influence derivative positions.
The need for reform became more visible during recent expiry sessions. Since CAS began, market participants have observed sharp swings in benchmark indices during the closing auction. Moneycontrol reported that the new mechanism had contributed to concerns around volatility, liquidity and possible manipulation, particularly on days when benchmark derivatives contracts expired.
One of the concerns behind the SEBI Expiry Day Overhaul is that liquidity in the new auction session has remained relatively thin. SEBI Chairman Tuhin Kanta Pandey has said that CAS itself will remain, while the regulator is examining whether derivatives settlement should be calculated differently. He also noted that other international markets experienced liquidity challenges when similar auction mechanisms were introduced.
The regulator’s position is important because the SEBI Expiry Day Overhaul does not represent a cancellation of the Closing Auction Session. Instead, SEBI is attempting to refine the way the auction interacts with derivatives settlement. Pandey has specifically said that CAS is here to stay, while the methodology for determining derivative closing prices on expiry days is being reworked.
Another important proposal involves order cancellations during the auction. Under the SEBI Expiry Day Overhaul, the regulator has proposed restrictions on cancellations when orders are close to the reference price. The objective is to reduce practices such as spoofing and other forms of order manipulation that could distort indicative prices and create misleading signals for other market participants.
SEBI has also proposed changes to the dissemination of indicative index values during the closing auction. Under the proposed SEBI Expiry Day Overhaul, the Indicative Index Value would no longer be disseminated during the auction, while the indicative equilibrium price for individual stocks would continue to be available. The measure is intended to reduce the scope for strategies that could exploit rapidly changing indicative index levels.
The timing of the Closing Auction Session could also change as part of the SEBI Expiry Day Overhaul. The regulator has proposed modifications to the auction window, including reducing the post-closing auction period to five minutes. Such changes are designed to improve the functioning of the process while limiting the period during which unusual order activity can create sharp price fluctuations.
Experts have broadly welcomed the objective of the SEBI Expiry Day Overhaul, although there are differences over how quickly the proposed changes should be introduced. Some market participants support moving toward a blended settlement methodology immediately, arguing that it could combine the information from regular trading with the price discovery generated by the auction. Others believe CAS needs more time to develop sufficient liquidity before it is incorporated into derivatives settlement.
The debate is particularly important for retail derivatives traders. The SEBI Expiry Day Overhaul could change how traders manage positions around expiry and how the final settlement price is determined. Traders who previously relied on the final 30-minute VWAP may need to adjust their strategies if the blended approach eventually becomes the standard methodology.
At the same time, the SEBI Expiry Day Overhaul could benefit traders if it succeeds in reducing unexpected price movements around expiry. Sudden changes in index levels can cause option premiums to move sharply, particularly when traders are holding highly leveraged positions. A more transparent and predictable settlement mechanism could reduce some of the uncertainty associated with the final minutes of expiry-day trading.
Recent incidents have demonstrated why manipulation safeguards are an important part of the SEBI Expiry Day Overhaul. SEBI had taken action following trading activity during the CAS on August 13, which was also a weekly expiry day for Sensex derivatives. The regulator alleged that certain trading activity distorted indicative prices and subsequently imposed market-access restrictions and ordered the impounding of alleged wrongful gains.
The episode showed how sensitive the new auction mechanism can become when large derivatives positions and relatively limited cash-market liquidity interact. The SEBI Expiry Day Overhaul is consequently not only about calculating a better settlement price but also about improving the overall integrity of the closing process. Stronger controls on order cancellations and better transparency could help reduce opportunities for participants to influence indicative prices.
The proposed framework also attempts to address the relationship between the cash and derivatives markets. Under the SEBI Expiry Day Overhaul, the regulator is examining whether the same closing mechanism should effectively serve both the cash market and derivatives settlement. A blended approach could allow the auction to contribute to settlement while retaining the information contained in the final period of continuous trading.
For stock exchanges, the SEBI Expiry Day Overhaul could require operational changes to trading systems, order management and settlement processes. Exchanges will need to ensure that any new methodology can handle large volumes efficiently and provide accurate reference prices during periods of heavy trading activity. The success of the changes will also depend on whether market participants actively participate in the auction and provide sufficient liquidity.
For long-term investors, the immediate impact of the SEBI Expiry Day Overhaul is likely to be limited compared with its effect on derivatives traders. However, closing prices are important for several parts of the financial market, including portfolio valuation, index calculations, exchange-traded funds and collateral management. A more reliable closing mechanism could therefore have broader benefits for the market.
The SEBI Expiry Day Overhaul also reflects the regulator’s willingness to respond relatively quickly to problems emerging from a new market structure. CAS was introduced only in August, but concerns about volatility and liquidity prompted SEBI to review the settlement methodology within weeks. The regulator has indicated that the auction mechanism itself will continue while specific issues around derivatives settlement are addressed.
SEBI’s consultation process will now be important for the SEBI Expiry Day Overhaul. The regulator is seeking feedback from market participants before finalising the framework, with public comments on the latest proposals due by October 3, 2026. The final rules could therefore change depending on feedback from exchanges, brokers, institutional investors, traders and other stakeholders.
The SEBI Expiry Day Overhaul could ultimately lead to a more balanced approach to expiry-day settlement. Rather than abandoning CAS, SEBI appears to be exploring ways to separate its price-discovery role from some of the risks created when derivatives settlement is directly linked to a relatively short and less-liquid auction period. This approach could help preserve the benefits of the new closing mechanism while reducing its unintended effects.
Market experts will closely watch whether the final rules improve liquidity without creating new complications. The SEBI Expiry Day Overhaul will need to balance several objectives at once: accurate price discovery, protection against manipulation, sufficient market participation, operational simplicity and predictable derivatives settlement. Any framework that achieves these goals could strengthen confidence in India’s rapidly growing derivatives market.
For investors and traders, the most important point is that the SEBI Expiry Day Overhaul is still at the proposal and consultation stage. The regulator has not yet replaced the existing settlement system with a final new methodology. Until SEBI formally approves and implements the changes, traders will continue to operate under the prevailing exchange rules.
Overall, the SEBI Expiry Day Overhaul marks an important attempt to address the volatility and manipulation concerns that emerged after India’s new Closing Auction Session was introduced. By considering blended VWAP settlement, temporary continuation of the existing methodology, tighter order-cancellation rules and changes to auction information, SEBI is seeking to make expiry-day trading more stable and transparent. The final outcome will depend on the consultation process, but the proposed reforms could significantly influence how India’s derivatives market operates during expiry sessions in the future.
