What is F&O Ban List?

It often happens that you plan to put some trades in stocks like BHEL, Sun TV, or Vodafone Idea in the futures & options market but then your broker tells you that you cannot take fresh positions as the stock is in the F&O Ban List. Have you wondered what exactly is the concept of this F&O Ban and what is this F&O Ban list all about? Here is a quick explanation of what is F&O Ban is, details of the F&O Ban list, and a lot more about the nuances of why stocks go into a ban.

F&O Ban List

The Clearing Members in F&O are subjected to a variety of risk management measures and one such measure is to limit the open interest as a percentage of market-wide position limits. Let us first look at the concept of Market Wide Position Limits or MWPL for Derivative Contracts on Underlying Stocks. Remember, MWPL is only applicable to stocks and not to indices. Indices do not have any MWPL limit applied to them. Check the table below.

The above table captures the market-wide position limit for the 20 stocks with the highest MWPL in the Indian market as of June. Normally, the higher the MWPL, the lower chances of the stock going into the F&O ban, and the lower the MWPL, the higher the chances of going into the F&O ban. That is why the MWPL analysis is the basis of the F&O ban list.

How is the ban F&O ban list disseminated?

At the end of each day, the stock Exchange disseminates aggregate open interest across all Exchanges in the futures and options on individual scrips along with the market-wide position limit for that scrip. This will include the open interest on futures and options on a stock on the NSE and the BSE. Then it is tested to see if the aggregate open interest for any scrip exceeds 95% of the market-wide position limit or MWPL that has already been explained for your benefit. This analysis is done scrip-wise. If the open interest across exchanges in futures and options is more than 95% of the market-wide position limit or MWPL, then the Exchange takes note of open positions of all client / TMs as at the end of that day in that scrip and puts the stock in the F&O ban list for trading from next day.

Normally, traders track the OI as it goes above 80% and starts lightening their positions. Remember that once the 95% limit is breached and the stock is put in the F&O ban list, then you cannot open fresh positions in futures or options, nor can you average your existing positions. Clients will only be allowed to trade in such F&O ban list stocks to decrease their positions through offsetting positions till the normal trading in the scrip is resumed.

When does trading resume once it is in the F&O ban list?

The normal trading in the scrip is resumed only after the aggregate open interest across Exchanges comes down to 80% or lower of the market-wide position limit or MWPL. Till then, the trading will be only open for offsetting positions. There is a facility in the system to display alerts once the open interest on the NSE in the futures and options contract in security exceeds 60% of the market-wide position limit for the stock. Such alerts are currently displayed at time intervals of 10 minutes each. However, even after the stock goes into the F&O ban list, positions in the cash market are not affected in any way.

How is the market-wide position limit or MWPL calculated?

That is an important question to understand. We know that the F&O ban list is largely based on the MWPL expressed in several shares. But then what exactly is this MWPL and how is it determined? In practice, MWPL is the lower of:

In short, the lower the float of the company and the narrower the trading, the higher the chances that it would land up in the F&O ban list. That is the crux of the matter.

• 30 times the average number of shares traded daily, during the previous calendar month, in the cash market segment.
• 20% of the number of shares held by non-promoters i.e., 20% of the free float, in terms of the number of shares of the company.

Penalties are applicable for non-compliance with the F&O ban list

Once the derivative contracts in specific stocks have crossed the 95% of the market-wide position limit they would automatically be put in the ban period. At that time, the exchange intimates the clients and the trading and clearing members that they shall trade in the derivative contracts of said security only to decrease their positions through offsetting positions. Any increase in open positions in the contracts in the F&O ban list will attract appropriate penal and disciplinary action following the extant regulations and the onus is on the traders and the clients to monitor the adherence to the F&O ban list.

Why are stocks banned in F&O?

Stocks are banned in F&O if the aggregate open interest of the stock across futures and options across both the stock exchanges of NSE and BSE exceeds 95% of the market-wide position limit or MWPL of the stock as disseminated by the stock exchange from time to time. Once a stock is in the F&O ban list, only offsetting positions to reduce open interest can be taken up and fresh positions are banned in F&O. This is to curb speculation.

What are the risks involved in options trading?

Option buying involves risks like price risk, loss of premium risk, and regulatory risk. Selling options involves risks like price risk, volatility risk, margin risk, risk of unhedged positions in the F&O market, etc.