In the derivatives market, stocks can be placed under the F&O ban list if they exceed the market-wide position limit (MWPL). This means traders cannot take new positions in futures or options contracts of that stock, but they can square off (exit) existing positions.
The ban mechanism is a regulatory measure by SEBI (Securities and Exchange Board of India) and stock exchanges (NSE/BSE) to prevent excessive speculation and volatility in certain stocks.
Key Criteria for Stock Ban in F&O
A stock is put under the F&O ban list if the total open interest (OI) of its derivative contracts exceeds 95% of the market-wide position limit (MWPL). Let’s break it down step by step:
1. Market-Wide Position Limit (MWPL)
- MWPL is the maximum number of open positions that can be taken in a stock’s derivative contracts.
- It is usually 20% of the free-float market capitalization of the stock.
- Free-float market cap means only publicly available shares, excluding promoters’ holdings.
2. Open Interest (OI) Check
- Open Interest (OI) represents the total outstanding positions in the stock’s F&O segment.
- If OI reaches or crosses 95% of MWPL, the stock enters the ban list.
3. Monitoring & Action
- Exchanges monitor MWPL and OI on a daily basis.
- If a stock exceeds 95% MWPL at the end of the trading day, it gets banned for trading in F&O the next day.
- New positions are not allowed, but existing ones can be closed.
4. Stock Removal from Ban List
- A stock exits the F&O ban list only when OI falls below 80% of MWPL.
- This is checked at the end of each trading session.
Example to Understand the Ban Process
Let’s take a practical example to understand how a stock gets banned.
Example: Stock ABC
Step 1: MWPL Calculation
Suppose stock ABC has a free-float market capitalization of ₹10,000 crore.- MWPL = 20% of ₹10,000 crore = ₹2,000 crore worth of positions allowed in F&O.
Step 2: Open Interest Growth
- Traders start taking positions in ABC’s futures and options.
- At the end of the trading day, the total OI in stock ABC reaches ₹1,950 crore, which is 97.5% of MWPL.
- Since OI has crossed 95%, the stock is placed under the F&O ban list for the next trading session.
Step 3: Trading Restrictions
- On the next day, no new positions can be taken in ABC’s F&O contracts.
- Only existing positions can be squared off (closed).
- If traders continue squaring off, OI will start reducing.
Step 4: Exit from Ban
- If, by the end of the next trading session, OI reduces below 80% of MWPL (₹1,600 crore), the stock is removed from the F&O ban list.
- If OI remains above 80%, the ban continues.
Important Points to Note
- Only Derivatives Trading is Restricted: The stock can still be traded normally in the cash market (NSE/BSE equity segment).
- MWPL is Updated Periodically: MWPL is recalculated based on changes in free-float market cap.
- Retail Traders Need to be Cautious: If a stock is nearing the ban limit, traders should avoid taking fresh F&O positions as they may not be able to exit easily.
- Heavy Penalties for Violation: If a trader accidentally takes a new position in a banned stock, the exchange may impose penalties.
- Ban Affects Liquidity & Volatility: Stocks in the ban list often see reduced F&O liquidity and higher price swings in the cash market.
Recent Stocks That Have Been in F&O Ban (Example)
| Date | Stock Name | Reason for Ban |
|---|---|---|
| 10 Feb 2024 | Indiabulls Housing Finance | OI > 95% of MWPL |
| 12 Feb 2024 | Punjab National Bank (PNB) | OI > 95% of MWPL |
| 15 Feb 2024 | RBL Bank | OI > 95% of MWPL |
Conclusion
- Stocks get banned in F&O when their Open Interest exceeds 95% of MWPL.
- New F&O positions are not allowed, but traders can square off existing positions.
- A stock exits the ban only if OI falls below 80% of MWPL.
- Traders should track F&O ban lists daily to avoid getting stuck in illiquid positions.