Sebi sees no CAS manipulation, eyes more participation

Mumbai: The Securities and Exchange Board of India (Sebi) has not observed any manipulation in the newly introduced closing auction sessions, chairman Tuhin Kanta Pandey said Wednesday, attributing the recent divergence in two major indices to circumspect trader participation in the first few days of the new system.

“We are considering all inputs to increase participation,” Pandey said on the sidelines of the Global Commodity Conclave in Mumbai. Any new mechanism, like the new process to determine closing prices of securities, needs time to settle and attract more participation, Pandey said.

The closing auction sessions (CAS), Pandey said, brought in ‘major market-structure reforms’ and CAS was in line with global practices. Pandey, however, acknowledged that the new system, introduced August 3, has caused concerns over lower participation and its impact on some market participants.

Read more: CAS chaos: Retail traders call for boycott, declare ‘No Trade Day’

The CAS replaced the earlier practice of determining the closing prices based on the average price of trades in the final 30 minutes of regular trading.

MFs Catching Up

Closing prices are used to calculate index closing levels, value mutual fund portfolios and settle derivatives contracts.

Since August 3, the closing prices of 200-odd stocks in the futures and options (F&O) segment have been determined through the auction process that lasts about 20 minutes – from 3:15 pm to around 3:35 pm. The move is aimed at making the closing rates less susceptible to the impact of large, price-distorting last-minute orders.

The mechanism, however, started off on a rough note as unusually wide divergences between Sensex and Nifty and losses in F&O trades sparked protests from traders and other market participants.

Mutual fund participation in CAS, which was around 5-6% on the first day, has since increased to about 20-25%, said Pandey.

Retail F&O Losses

He also flagged continuing losses among options traders, particularly on expiry days. Sebi is preparing a detailed analytical report that will provide a more granular picture of who is making losses in the derivatives market.

Pandey said market losses were an inherent part of trading, but warned that expiry-day options trading was more complicated than many participants understood.

“Loss and profit are part of market risks that people have to take,” he said. “What we are trying to emphasise is that in many situations, this kind of trading – particularly option trading on expiry days – is not as simple as people assume, and heavy losses are continuing.”

Commodity Derivatives

On the commodity derivatives market, Pandey said Sebi was examining measures to improve participation, liquidity and trading volumes. The regulator has proposed allowing foreign portfolio investors (FPIs) to participate in exchange-traded commodity derivatives and is also looking at greater participation from mutual funds.

Sebi is also making efforts to make it easier for institutional investors to operate in Indian markets. The Sebi chief said the regulator was looking at areas where procedural hurdles could be reduced, including registration, the block deal framework and netting.

Pandey said Sebi had also approached the GST Council Secretariat over the taxation of physical commodity deliveries.

At present, warehouses spread across different states can create a requirement for separate state-level SGST registrations. “What we are saying is that we have sent proposals to the GST Council Secretariat because when delivery happens in the commodity market, warehousing can be anywhere,” Pandey said. “So instead of requiring separate registrations across all states, it can be brought under an IGST model rather than SGST.”

He said the proposal would require further discussions with the GST Council since both the Centre and states were involved. “We will need to engage further with the GST Council, as both the States and the Centre are involved,” he added. “If a practical solution emerges – keeping the revenue identical – it will help everyone significantly, and delivery-based contracts will become much more easily executable.”