FIA flags concerns over Sebi's closing auction plan, seeks changes

The Futures Industry Association (FIA), a global body representing derivatives market participants, has suggested modifications to the Securities and Exchange Board of India’s (Sebi) proposal to introduce a closing auction session (CAS) in the equity cash market.

 

The recommendations aim to ensure consistency and operational efficiency in determining closing prices.

 

According to FIA, a CAS could help deepen liquidity in the cash market, improve transparency in settlement price discovery, and enable passive funds to rebalance more efficiently by reducing tracking error. However, it flagged potential challenges if the framework is adopted without harmonisation between the two stock exchanges, which could lead to discrepancies in closing prices and executed volumes.

 

Sebi, in August, released a revised proposal for the CAS to determine share closing prices, following a discussion paper first floated in December 2024. The regulator has set September 19 as the deadline for public comments on the proposals.

 

The industry body has also sought clarity on the methodology for index settlement under the revised structure.

 

Sebi has proposed a dedicated 20-minute post-market session for CAS, from 3:15 pm to 3:35 pm, split into four sub-sessions. FIA raised concerns that the proposed five-minute expiry window (3:30pm-3:35 pm) may not be enough for participants to manage expiring single-stock options and futures, particularly given thin liquidity in the post-close session.

 

It has also cautioned against the suggested staggered close structure, calling it operationally complex. FIA added that the proposed framework creates a 25-minute gap on expiry days where non-expiring contracts would continue trading without a reliable cash-market reference price-- reducing participants’ hedging ability.

 

While Sebi plans to phase in CAS starting with liquid F&O stocks, FIA has recommended retaining the current 30-minute volume-weighted average price (VWAP) methodology for expiring front-month index options until the auction mechanism matures.