How SEBI Will Settle Expiring F&O Contracts, and What Changes on Expiry Days

The Securities and Exchange Board of India (SEBI) has changed how expiring stock and index derivatives will be settled. A circular dated 15 October 2026 drops the closing auction as the settlement reference and uses the volume-weighted average price (VWAP) of the last 30 minutes of continuous trading instead.

The closing auction stays. It will run as a 10-minute session from 3:30 to 3:40 pm, with the main framework taking effect on 7 December 2026. Rules for moving unexecuted limit and iceberg orders into the auction start on 8 February 2027.

The changes separate two prices that the January design had linked: the closing price of cash stocks and the settlement price of expiring F&O contracts. The revision follows objections from market participants after the auction was introduced.

What the January Framework Set Up

SEBI introduced the Closing Auction Session (CAS) in the equity cash segment through a circular dated 16 January 2026, reference HO/47/11/11(3)2025-MRD-POD2/I/2765/2026. The session is a short auction at the end of the trading day that determines closing prices for securities in the equity cash segment. 5paisa notes that the design resembles closing auctions used in the United States and Hong Kong.

Under that design, the settlement price of expiring F&O contracts was tied to the auction result. The 15 October circular reverses that link, so expiring contracts will no longer settle on the auction. Outlook Money describes the change as a reversal of the January decision, while DNA India describes the 30-minute VWAP method as unchanged.

The January circular's title also refers to certain modifications to the pre-open auction session.

How Expiring Contracts Will Be Priced

For index derivatives, the settlement price will be the index value calculated from the VWAP of its constituent securities during the last 30 minutes of continuous trading. Exchanges must compute an indicative index value in real time during that window and disseminate it continuously.

For stock derivatives, the settlement price will be the VWAP of the underlying stock over the same 30 minutes, calculated across all stock exchanges.

Because continuous trading hands over to the auction at 3:30 pm, the window covers trading from 3:00 to 3:30 pm. Expiring contracts are therefore settled on trades completed before the closing auction opens.

Trades executed in that half hour feed into the VWAP, while orders placed during the auction do not.

According to TaxGuru, exchanges compute the indicative VWAP of the underlying stock in real time during that window and disseminate it continuously to market participants.

The circular also states that it modifies the methodology for determining settlement prices of stock and index derivatives contracts.

Why SEBI Reversed Course After Consultation

SEBI issued a consultation paper dated 12 September 2026 before the final circular. The regulator cited the need for efficient price discovery and orderly functioning of the cash and derivatives segments, and it considered recommendations from its Secondary Market Advisory Committee.

Market participants pointed to sharp movements in derivatives prices on expiry days after the auction was introduced. Some raised concerns that a settlement benchmark resting on a short auction carried risks of concentration and manipulation.

5paisa reports that sharp movements in derivatives prices on expiry days prompted concerns from market participants and eventually a review by the regulator. Outlook Money reports that the reversal followed industry opposition to linking expiry settlement to the auction.

5paisa reports that the regulator had proposed discontinuing publication of the indicative index value during the 10-minute CAS window. Much of the feedback argued that sophisticated trading desks could calculate the indicative index level themselves, so removing it from public view could reduce transparency for other investors without necessarily addressing concerns around manipulation.

The October decision therefore covers the expiry settlement method, the auction timings and the treatment of unexecuted iceberg orders.

The 3:30 to 3:40 pm Closing Auction

From 7 December 2026, the closing auction runs on every trading day from 3:30 to 3:40 pm.

The first minute, from 3:30 to 3:31 pm, is used to calculate the reference price and to move from continuous trading into the auction. Outlook Money says the reference price is derived from the VWAP of the final 15 minutes of continuous trading.

Between 3:31 and 3:36 pm, both market and limit orders are accepted. From 3:36 pm, only limit orders are accepted, and market orders can no longer be modified or cancelled.

Iceberg orders, which display only part of their quantity, and stop-loss orders are not allowed during the auction.

Order entry closes at a random time between 3:38 and 3:40 pm, followed by order matching.

CorpLaw Updates lists the reference price, price bands and margins among the framework modifications effective on 7 December, alongside the timings and VWAP settlement method.

The 15 October circular reverses that link, so expiring contracts will no longer settle on the auction.

Expiry Days and Closing Prices for Cash Stocks

On expiry days, expiring index derivatives stop trading at 3:30 pm, when the auction begins. Non-expiring index derivatives continue until 3:45 pm.

Stock derivatives trade until 3:45 pm on every trading day, including expiry days.

Closing prices for cash-market stocks still come from the auction, which now runs from 3:30 to 3:40 pm. Under the January design, expiring F&O contracts settled on that auction result. Under the revised rules, they settle on the 30-minute VWAP instead, so the two prices are set by different methods.

The 30-minute window and the auction therefore meet at 3:30 pm.

Closing auction timings apply on every trading day, while the expiry settlement rule applies only to expiring contracts.

Key Dates Under the Revised Framework

The January circular is dated 16 January 2026. SEBI issued its consultation paper on 12 September 2026, and the final circular, reference HO/47/11/11(3)2025-MRD-POD2/I/23843/2026, is dated 15 October 2026.

The main changes take effect on 7 December 2026, including the 3:30 to 3:40 pm timing and the VWAP-based settlement for expiring contracts.

The rules for moving unexecuted limit and iceberg orders from continuous trading into the auction take effect on 8 February 2027, about two months later.

The circular covers the timings and operational aspects of the closing auction as well as the derivatives settlement methodology.

The 8 February 2027 date applies only to the order-transition rules, while the rest of the framework starts on 7 December 2026.