Every day the NSE issues a list of securities in which derivatives trading is disallowed, except under specific conditions. This list, called the F&O ban list in market parlance, is widely tracked by players who trade in equity derivatives. This explainer attempts to help cnbctv18.com users get a clear picture of this term by decoding the jargon around it.
What is the F&O ban list?
NSE’s F&O ban list contains securities in which no fresh futures and options positions can be taken up. Traders with existing positions in that security can unwind or square up their positions.
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When is a security added to the ban list?
When the open interest—open positions or trades that are yet to be settled—in a security exceeds 95 percent of the market wide position limit (MWPL).
How is MWPL calculated?
MWPL is 20 percent of the free float market capitalisation. For instance, if the equity base of a company consists of 1,000 shares with non-promoter holding at 60 percent (600 shares), the market-wide position limit for the stock will be 120 shares (20 percent of the 600 shares). At the end of the day, the open positions in futures and options contracts in the security should not exceed 95 percent of this 120 shares. Meaning, outstanding open positions should not be more than 114 shares. If the open positions—futures and options contracts combined—exceed 114 shares, the security will be put in the ban list.
Every futures and options contract has a lot size. You will need to buy or sell at least one lot for trading in equity derivatives. If one lot is equal to, say 6 shares, then in the above example, not more than 19 lots (114 divided by 6) across futures and options can be open at any point in time during the settlement cycle.
What happens when the security is put in a ban list?
No fresh futures or options contracts can be bought or sold. If traders take fresh positions, they will be penalised by the exchange. Traders with open positions can reduce their positions by taking an offsetting position. For example, if a trader is long 100 lots of futures, he can sell up to 100 lots of futures, as long as there is a buyer for those many lots. Likewise, somebody who is short 100 lots can buy up to 100 lots.
When is the security removed from the ban list?
When the open positions in the security come down to 80 percent of the market wide position limit, it will be removed from the ban list and fresh positions can be taken.
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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 short (sell) side of the trade will be under pressure to cover up their positions. And 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.
(Edited by : Dipti Sharma)