Market Wide Position Limit

Derivatives let people build very large positions in a stock with a small outlay. If the derivatives market as a whole holds too big a claim on a company's tradable shares, prices can be manipulated and physical settlement can become impossible.

The market-wide position limit (MWPL) caps that total. It is one of the three position limits SEBI lays down in equity derivatives: client-level, trading member-wise and market-wide.

The workbook states it plainly: MWPL for futures and options on individual securities is 20% of the number of shares held by non-promoters in that security — that is, 20% of the free float in number of shares.

When the market gets close to that ceiling, no fresh positions may be opened in the stock (a ban on fresh positions, as the workbook puts it), though existing positions can be reduced.

The mechanics, from Chapter 7, section 7.7:

Monitoring uses aggregate open interest across exchanges, not one exchange's figure.

Enforcement. MWPL violation is checked at the end of every trading day. For each day the ban is in force, any member or client who increased an existing position or created a new one is penalised; the penalty is recovered from the clearing member on T+1 with the pay-in.

Linked limits. A trading member's combined futures and options limit in a stock is 20% of the MWPL per exchange. And MWPL doubles as an eligibility test: a stock needs an MWPL of not less than Rs 1,500 crore on a rolling basis to have derivatives at all (Chapter 6, section 6.2).

MWPL = 20% × Number of shares held by non-promoters
Alert at 60% · Ban above 95% · Resume at or below 80%
Trading member limit (stock) = 20% × MWPL

Illustrative. The company and its shareholding are hypothetical; the percentages are the workbook's.

Kaveri Steel has 50 crore shares, of which 20 crore are held by non-promoters.

MWPL                  = 20% × 20 crore shares = 4 crore shares
Alert level (60%)     = 2.4 crore shares
Ban level (95%)       = 3.8 crore shares
Resume level (80%)    = 3.2 crore shares
TM limit per exchange = 20% × 4 crore        = 80 lakh shares

Monday: aggregate open interest across NSE and BSE reaches 3.9 crore shares — 97.5% of MWPL. From Tuesday, no fresh positions.

Tuesday: Anil, who is long futures, adds another lot. At end of day the exchange detects the increase and charges a penalty, collected from his clearing member on T+1.

Thursday: traders square off; open interest falls to 3.3 crore (82.5%). Still above 80% — the ban continues.

Friday: open interest falls to 3.1 crore (77.5%). Normal trading resumes.

Notice the gap between 95% and 80%. It stops a stock flipping in and out of the ban every day.

Chapter 7, section 7.7 (Position limits), sets out MWPL with the 20%, 60%, 95% and 80% figures and the violation regime; section 7.8 lists MWPL violation among the penal lapses. Chapter 6, section 6.2, uses MWPL of Rs 1,500 crore as a stock eligibility criterion. Every one of those numbers is examinable, and the 95%/80% pair is a favourite.

• 20% of non-promoter shares, not 20% of total shares or of market capitalisation.
• Ban above 95%, resume at 80% or below. Not "resume below 95%".
• 60% is only an alert; nothing is restricted.
• Aggregate across exchanges. One exchange's open interest is not the test.
• The ban starts from the subsequent trading day, not intraday.
• During a ban you may reduce positions; increasing them attracts a penalty.
• Rs 1,500 crore is the MWPL needed for eligibility, a different use of the same concept.