NSE’s F&O ban: All you need to know

By - Furquan Moharkan

The five stocks that have been put in the futures and options (F&O) ban for trade on Friday, October 8, 2021 by the National Stock Exchange (NSE) are: India’s public sector miner National Aluminium Company Limited (Nalco), public sector banks Canara Bank and Punjab National Bank (PNB), shadow bank Indiabulls Housing Finance, and Steel Authority of India (SAIL).

These securities are banned under the F&O segment because they have crossed 95% of the market-wide position limit (MWPL), as per the NSE – the world’s largest derivative exchange.

What is an F&O stock?

A stock futures contract – part of derivatives market – is meant for purchase or sale of a stock at a pre-set price for delivery on a later date. A call option on a stock would allow you to purchase the underlying asset at a pre-determined price on a future date, while a put option allows you to sell the underlying asset at a pre-set rate. Normally, delivery is not taken or given on the F&O segment. It is only the difference in buy or sell price, which is exchanged between buyers and sellers – who are unknown to each other.

What is MWPL?

The MWPL (market-wide position limit) is set by the respective stock exchanges. The MWPL sets the maximum number of contracts that can be open at any time (referred as Open Interest). In case of NSE – which happens to be the world’s largest derivative exchange – the open interest limit is set at 95%. Therefore, the F&O contracts of a stock enter a ban period if the open interest crosses 95% of the MWPL.

What does it mean for investors?

In case of PNB, the move may hit the trading capabilities of 147 foreign portfolio investors (FPIs) and 1.6 million retail investors – many of whom would be Indians staying abroad. In case of NALCO, there are 135 FPIs and 3,267 non-resident Indians (NRIs) as investors. In case of Indiabulls, the shadow bank has 198 FPI investors, along with 3,160 NRI retail investors.