Western Sydney Wanderers face hefty punishment over the offensive banner their fans displayed during the Sydney derby after Football Federation Australia issued the club with a show-cause notice on Monday.

The governing body said the display, which depicted a blue-faced man resembling Sydney FC coach Graham Arnold performing oral sex, was "offensive to any reasonable member of the public".

The banner has been widely condemned as homophobic. Sydney FC have requested a formal apology on behalf of Arnold and his family.

Fans in the Wanderers end held the "tifo" aloft for several minutes in front of the near 45,000-strong family-friendly crowd before it was eventually forced down by security. Fans group the Red and Black Bloc saluted the banner on social media after the game.