HOW A STOCK ENTERS IN FnO BAN LIST: RULES & STRUCTURE PERTAINING TO MWPL

The Market-Wide Position Limits (MWPL) are a regulatory framework set by the Securities and Exchange Board of India (SEBI) to prevent excessive speculation in the derivatives segment of the stock market. The MWPL is the maximum number of open positions (both long and short) that can be held by all market participants together in the derivatives contracts of a particular underlying stock.

Rules regarding MWPL: –

1. MWPL is calculated as 20% of the free-float market capitalization of a stock. Free float refers to the shares that are available for trading in the market (excluding promoter holdings, government holdings, etc.).

2. The total open interest (sum of all open positions) in futures and options contracts on a particular stock across all exchanges is capped by the MWPL.

3. Entry Rules –

• • Normal Conditions: When a stock’s open interest is below 95% of its MWPL, traders can freely enter new derivative contracts (futures and options) on that stock, subject to individual position limits and margin requirements.

• • Pre-Ban Stage: When the open interest in a stock’s derivatives reaches 95% of the MWPL, no new positions are allowed to be created in that stock’s derivatives. This is a precautionary stage just before the ban.

4. Exit Rules – 

• • During Ban Period: Once a stock’s open interest crosses 95% of its MWPL, it enters the ban period. During this period, no fresh positions can be created in the derivatives contracts of that stock.

  • Only Exit Allowed: Traders are only allowed to reduce their positions, meaning they can only close existing contracts but cannot open new ones.

  • Post-Ban Conditions: The stock remains under the ban until the overall open interest drops to 80% or below of the MWPL.
    Once the open interest falls below 80%, the ban is lifted, and traders are again allowed to take new positions in the stock’s derivatives.

6. When a stock enters the ban period, it restricts trading activity, which can impact liquidity and may lead to increased volatility in that stock’s price.

7. Penalties may be imposed on traders who create fresh positions in stocks that are under the MWPL ban.

Structure regarding MWPL: –

1. Free-Float Market Capitalization: This is the total market value of the publicly traded shares of a company. It is calculated as the stock price multiplied by the number of shares available for trading.

2. Percentage for MWPL: SEBI mandates that MWPL is 20% of this free-float market capitalization.

3. Open Interest Limit: The MWPL represents the maximum total open interest in derivatives (futures and options) contracts for a particular stock across all exchanges.

• • Open interest is calculated by adding all the contracts from opened trades and subtracting the contracts when a trade is closed.

  • Example: If A buys 40 futures contracts, B buys 40 futures contracts, and C sells all 80 contracts, the open interest is 80. This is because there are 80 contracts on the long side and 80 on the short side

4. Derivative Instruments Covered: MWPL applies to both futures and options contracts on the underlying stock.

5. Regular Monitoring: Exchanges like NSE and BSE monitor the open interest and MWPL thresholds regularly to ensure compliance.

6. Public Disclosure: Information regarding MWPL, including stocks approaching the limit or under a ban, is publicly disclosed for transparency.

7. Preventive Measures: MWPL aims to prevent excessive speculation and ensure market stability by imposing limits on the total open interest.

8. Enforcement: Exchanges and regulatory bodies enforce MWPL rules, including penalties for violations and restrictions on new positions when limits are breached.