India needs trust-driven capital markets; SEBI reviewing derivative expiry settlement rules: Tuhin Kanta…

Fresh updates from the financial markets indicate that India needs markets that can mobilise capital, manage risk and inspire trust, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey stated on Saturday. He noted that the market regulator keeps strengthen the broader market structure so that households can invest with confidence, enterprises can raise capital to grow, businesses can manage risk, and intermediaries uphold high standards of conduct.

"After introducing the Closing Auction Session (CAS), we are examining concerns relating to the settlement price framework for derivatives on expiry days," Pandey stated.

SEBI introduced a dedicated Closing Auction Session mechanism for bourses to improve price discovery for eligible stocks at market close. Instead of deriving closing prices solely through a Volume-Weighted Average Price (VWAP) calculation, CAS uses a call-auction window at the end of the trading day to execute buy/sell orders simultaneously at a single equilibrium price.

"We additionally want deeper and more liquid cash markets, wider participation, stronger securities borrowing and lending. And efficient hedging and arbitrage can improve price discovery and strengthen the interaction between cash and derivatives market," Pandey stated at Commodity and Capital Traders at large Association of India’s (CPAI) 12th International Convention in New Delhi.

Pandey further stated that the regulator is examining position limits for non-agricultural contracts with the objective of improving liquidity and depth without weakening risk controls.

"Second, market design must allow contracts to gain scale. In some agricultural commodities, physical settlement from the outset can impede market development. A phased approach can allow the contract to mature before physical settlement becomes mandatory," he further noted.

"We must additionally keep reducing structural friction. We'll continue our engagement on GST-related issues affecting participants who give or receive commodities through exchange platforms," Pandey noted.

In his address, Pandey additionally highlighted the measures taken by SEBI to broaden institutional participation.

"We have widened FPI access to indices and physically settled non-agricultural contracts can add liquidity and strengthen price discovery, while position limits and delivery savings protect the physical market," stated Pandey.

In September, SEBI allowed FPIs to participate in non-agricultural commodity derivatives, subject to safeguards around delivery and exit from positions. This move followed SEBI's August consultation paper on FPI participation in exchange-traded commodity derivatives. The proposal is aimed at widening institutional participation in the domestic commodity derivatives market while putting in place safeguards to avoid delivery-related complications for overseas market participants.

"We have additionally widened the range of risks these markets can help manage. Electricity futures provide generators, discoms, and industrial consumers with a regulatory mechanism to manage power price risk," Pandey noted.

"We have made IPO disclosures easier for retail market participants through a concise, standardized, and abridged prospectus at the DRHP stage. The same approach extends to corporate bonds, REITs, and InvITs. We have widened the investor base, introduced greater flexibility, and taken measures to deepen the bond distribution ecosystem," he further remarked.

"In the primary market, we have reintroduced open market buybacks through bourses with a simpler process," Pandey stated.