The National Stock Exchange added scrips of the private lender RBL Bank on its F&O ban list for August 25. The date is the monthly expiry day for August derivative contracts. Shares of the bank have seen a strong rally in the past few days, climbing 17 percent to close at Rs 121.75 on August 24. “It is hereby informed that all clients/members shall trade in the derivative contracts of said securities only to decrease their positions through offsetting positions. Any increase in open positions shall attract appropriate penal and disciplinary action,” NSE said in its notice of the ban.
What is an F&O ban?
An F&O ban, or a Futures and Options ban, is implemented by a stock exchange to crack down on speculation. Every stock exchange sets up a market-wide position limit (MWPL), which is the total limit of the total number of options and contracts that can be open at any time (open interest). If the open interest crosses 95 percent of the MWPL then the stock exchange lists the scrips of the stock on the F&O ban list.
The ban is enacted as excessive speculation can not only hurt the stock’s movement but can also cause further ripples in the wider market.
What happens during the ban?
When a stock’s F&O contracts are placed on the ban list, no fresh positions, i.e. no new options or futures, can be opened. Exchanges do allow investors and traders to exit their existing positions for the stock’s scrips. Though investors and traders can still trade in the cash segment of the stock as only futures and options contracts are banned from being opened up.
When does the ban end?
The ban only comes to an end when open interest for the scrip falls below 80 percent. Despite the relatively short period of the ban, the impact on the price movement of the scrip is immense.
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