Every day, the NSE releases a list of securities in which derivatives trading is prohibited, except under specific conditions. This list, commonly referred to as the F&O ban list in the financial market, is closely monitored by individuals engaged in equity derivatives trading. This explainer aims to assist users of moneycontrol.com in gaining a comprehensive understanding of this concept by demystifying the jargon.
The F&O ban is a concept that restricts traders from initiating new positions in a particular entity (stock) in the futures and options segments for a specific duration. During this period, existing positions can still be squared off or exited. Additionally, the stock can continue to be traded in the cash segment, where such restrictions do not apply. The primary objective of the F&O ban for a specific stock is to curtail excessive speculative activity.
The F&O ban is fundamentally rooted in a comprehensive understanding of the Market Wide Position Limit (MWPL) set by the exchanges. When the open interest of a stock exceeds 95 percent of the MWPL, all F&O contracts for that stock enter a ban period. This applies irrespective of whether the open interest pertains to futures, call options, or put options. The ban is lifted only when the open interest falls below 80 percent.
It's important to note that MWPL is not applicable to indices. Traders focused on index-specific instruments need not be concerned about a ban.
MWPL is determined based on the lower of two factors:
• 30 times the average daily trading volume of shares in the cash segment of the stock exchanges during the preceding month.
• 20 percent of the shares held by non-promoters, or the free float holding.
When is F&O ban lifted?
The stock exchange is responsible for issuing the ban list on a daily basis. The duration of the ban is not predefined. Trading in the F&O segment is only allowed to resume when the open interest drops below 80 percent of the MWPL. Until that point, the ban remains in effect for initiating new F&O positions.
Can F&O positions be rolled over during the ban period?
No, SEBI regulations prohibit the rollover of open F&O positions during a ban period for the traded contract.
What happens when a trader places orders on stocks in the F&O ban list?
Traders attempting to open new positions on a stock included in the F&O ban list are subject to a penalty equal to 1 percent of the value of the increased position.
Impact of F&O Ban
Excluding certain stocks from the F&O trading list is one of the various measures stock exchanges employ to regulate speculative activity in the derivatives market. Left unchecked, such activity can result in market instability, leading to decreased investor confidence. A stock may also be placed in the F&O ban list to control its volatility. For instance, Delta Corp recently found itself on the F&O ban list due to tax-related issues and media attention surrounding the stock.
When a security is put in the ban list, does it affect cash and derivatives prices?
It can, especially in illiquid securities, depending on which side of the trade the strong players are on. Say if the strong traders are long on the futures as well as the stock and have the wherewithal to pay marked-to-market margins, those on the short (sell) side of the trade will be under pressure to cover up their positions. The strong players can dictate the price because no new players can enter the fray as long as the security is in the ban period. Likewise, if the strong players are short on the stock, those on the long (buy) side will be under pressure to unwind their positions.
(Based on inputs by Osho Krishan, Sr. Analyst- Technical and Derivative Research at Angel One)
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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