SEBI Proposes Major Changes to F&O Settlement and Closing Auction Session

On September 12, 2026, SEBI released a consultation paper proposing seven changes to India's Closing Auction Session (CAS) and F&O expiry-day settlement — including a new blended VWAP method for settlement prices, the removal of the Indicative Index Value during CAS, a shorter transition gap between continuous trading and the auction, and revised market timings. Public comments are open until October 3, 2026. Nothing has been finalized yet.

If you trade Nifty, Bank Nifty, or single-stock futures and options around expiry, these proposals directly affect how your positions get priced at close. Here's a complete, plain-English breakdown.

Background: Why Is SEBI Reviewing CAS Just Weeks After Launch?

The Securities and Exchange Board of India introduced the Closing Auction Session for F&O-linked stocks on August 3, 2026, replacing the older 30-minute VWAP method with an auction-based closing price mechanism. The idea was to make closing prices harder to manipulate and more reflective of genuine buy-sell interest at the end of the day.
 

In practice, the rollout exposed some friction points. Data from the exchanges showed a sharp jump in derivatives turnover concentrated in the final minutes of trading, and index options activity on the NSE and BSE fell noticeably in August compared to July, with option order volumes also declining. Market participants — including the Futures Industry Association (FIA) — flagged concerns about how the auction price and expiry settlement price could diverge, and about confusing "phantom" index values appearing during the auction window.
 

SEBI Chairman Tuhin Kanta Pandey clarified on September 10, 2026, that CAS itself is here to stay and will not be scrapped. Instead of a rollback, the regulator has proposed refinements — a fairly standard "consult, adjust, iterate" approach for a mechanism this new.

The 7 Proposals SEBI Has Put on the Table

1. A New (or Alternative) Settlement Price Methodology

This is the change that matters most for F&O traders. SEBI has floated two options for calculating expiry-day settlement prices on index and stock derivatives:

• Option A — Blended VWAP: Combine the volume-weighted average price from the last 30 minutes of continuous trading with the 10-minute Closing Auction Session, weighted by actual traded turnover across both windows.
• Option B — Interim continuation of the old method: Keep using only the VWAP of the last 30 minutes of continuous trading for settlement (essentially the pre-CAS approach) for at least a year, before eventually moving to the blended model once the auction system matures.

Either way, the goal is to make settlement prices less sensitive to a sudden swing inside a narrow 10-minute auction window — something that has worried traders holding open positions through expiry.

2. Removing the Indicative Index Value (IIV) During CAS

SEBI wants to stop disseminating the Indicative Index Value derived from indicative equilibrium prices while the auction is running, since this number moves rapidly as orders are placed and cancelled and can be mistaken for an actual index level. Individual security-level indicative equilibrium prices would still be published — only the aggregated index-level figure goes away during the auction.

3. Shorter Transition Gap Between Continuous Trading and the Auction

Currently, there's roughly a five-minute gap between the end of continuous trading and the start of CAS. SEBI has proposed narrowing this to closer to one minute, reducing the dead zone where prices can't react to news or order flow.

4. Shorter Post-Auction Derivatives Trading Window

The period during which derivatives keep trading after the auction closes could shrink from 10 minutes to 5 minutes, tightening the overall closing sequence.
 

5. Revised Market Timings (Two Options Proposed)
 

SEBI has put forward alternative timing structures — for example, one option keeps continuous trading in CAS-covered stocks running until 3:30 PM, followed by the auction, with derivatives trading continuing to around 3:45 PM. The exact final timetable will depend on feedback received during the consultation.

6. Order Cancellation and Modification Rules Within the Auction

Orders placed more than 1% away from the reference price would not be allowed to be cancelled once the no-cancellation period of the auction begins — but they could still be modified to improve their price. The existing 3% price band around the reference price during CAS would stay unchanged.
 

7. Iceberg Orders Convert to Regular Limit Orders in the Auction
 

Any unexecuted quantity from iceberg orders at the end of regular trading would carry into the auction as a normal, fully disclosed limit order rather than retaining its hidden-quantity feature.

Key Dates to Remember

Note that these are proposals under consultation, not final rules. SEBI will review feedback before deciding whether to adopt Option A or Option B for settlement, finalize the timing changes, or modify the framework further.

What This Means for F&O Traders

• Expiry-day risk management: If the blended VWAP option is adopted, settlement prices should become less exposed to a sharp move inside the last 10 minutes — useful for anyone carrying option positions into expiry.
• Less reliance on IIV as a signal: Traders who've been watching the indicative index value during the auction for cues will need to shift to reading individual security-level indicative prices instead, once that change takes effect.
• Tighter closing sequence: A shorter transition gap and shorter post-auction window mean less time to react in the final minutes — order placement and modification strategy near the close may need adjustment.
• Order strategy near the reference price: With cancellations restricted beyond 1% of the reference price during the no-cancellation period, traders will need to place orders more deliberately rather than relying on last-second cancellations.
• This is not a reversal of CAS: SEBI has been explicit that the auction mechanism itself is staying. The debate is about calibration, not whether closing auctions belong in Indian markets at all.

Because the mechanics of expiry settlement, VWAP calculations, and auction price bands can get technical fast, this is exactly the kind of regulatory shift that's easier to navigate with a solid grounding in how F&O markets actually work. Our Futures & Options Trading Strategies course and the more advanced Trade Smart Using Futures and Options (Intermediate + Advanced) program both cover expiry mechanics, settlement pricing, and risk management around auction sessions in detail. If you specifically trade index derivatives, the Nifty & Bank Nifty Trading Strategies & Methods course is worth a look too.

For a deeper walkthrough of how CAS itself works and what led up to this review, see our earlier explainer: SEBI CAS Review 2026: What Options Traders Need to Know.

Frequently Asked Questions

Q1. What is SEBI proposing to change about F&O settlement?

SEBI has proposed two alternative methods for calculating expiry-day settlement prices for index and stock derivatives: a blended VWAP combining the last 30 minutes of continuous trading with the 10-minute Closing Auction Session, or a temporary continuation of the older 30-minute-only VWAP method.
 

Q2. When was the Closing Auction Session (CAS) introduced?

CAS was introduced for F&O-linked stocks on the equity cash market from August 3, 2026, replacing the previous closing-price method for those stocks.

Q3. Is SEBI scrapping the Closing Auction Session?

No. SEBI Chairman Tuhin Kanta Pandey confirmed on September 10, 2026, that CAS will continue. The current proposals aim to refine its operation and settlement methodology, not remove it.
 

Q4. By when can traders and market participants submit feedback?

SEBI has invited public comments on all seven proposals until October 3, 2026.
 

Q5. What is the Indicative Index Value (IIV), and why does SEBI want to remove it during CAS?

The IIV is an index-level figure derived from indicative equilibrium prices shown during the auction. SEBI wants to stop publishing it during CAS because it fluctuates as orders are placed or withdrawn and can be misread as an actual index level, even though individual stock-level indicative prices would still be shown.
 

Q6. How will these changes affect options traders specifically?

Options traders holding positions through expiry are the most directly affected, since settlement price methodology determines the final value used to settle in-the-money options. A blended VWAP approach is intended to reduce the influence of a narrow, potentially volatile 10-minute auction window on that final price.
 

Q7. Has SEBI finalized these changes?

Not yet. These are proposals under a consultation paper dated September 12, 2026. Final rules will depend on the feedback SEBI receives and its subsequent review.

Final Word

SEBI's latest consultation paper is a mid-course correction rather than a reversal; the regulator is trying to iron out volatility and confusion that surfaced in the first few weeks of CAS, while keeping the underlying auction mechanism intact. For active F&O traders, the practical takeaway is to track the October 3 deadline, watch for the final settlement methodology SEBI chooses, and be ready to adjust expiry-day and near-close order strategies once the rules are notified.

Want to build a stronger foundation in derivatives mechanics before the next round of regulatory changes lands? Explore our full course catalog or get in touch with our team to find the right F&O program for your trading goals. You can also browse more market-update explainers on our blog.

This article is for educational purposes only and does not constitute investment advice. SEBI's proposals are subject to change following the public consultation process; always verify the latest status on SEBI's official website before making trading decisions.