Foreign exchange

Foreign exchange transactions in Iceland are unrestricted unless otherwise provided for by law. The same applies to cross-border payments and capital transfers. It is permissible, however, to take measures to prevent severe disruption of monetary, exchange rate, and financial stability. Foreign exchange matters in Iceland are provided for in the Foreign Exchange Act, no. 70/2021.

According to Article 3, Paragraph 1 of the Foreign Exchange Act, it is prohibited to act as an intermediary in foreign exchange transactions without statutory authorisation. Acting as an intermediary in foreign exchange transactions involves either carrying out foreign exchange transactions as a commercial activity for a fee or brokering foreign exchange transactions between other parties for a fee. The entities that are authorised to conduct such transactions – in addition to the Central Bank of Iceland, which conducts transactions with foreign currency and acts as an intermediary in foreign exchange transactions pursuant to Article 27, Paragraph 1 of the Act on the Central Bank of Iceland, no. 92/2019 – mainly include commercial banks, savings banks, other payment services providers, and possible currency exchange providers. However, the Bank may grant authorisation to operate a foreign exchange market that entails intermediation in foreign exchange transactions. The requirement for such authorisation is that the operation of the market must be conducive to increased transparency and more efficient price formation in the foreign exchange markets.

The Rules on Derivatives Transactions in which the Icelandic Króna is Specified in a Contract Against Foreign Currency, no. 412/2022, took effect on 8 April 2022. The Rules limit the total amount of derivatives transactions – i.e., those specifying the Icelandic króna against foreign currency – that domestic commercial banks may have in their derivatives books. These limits are intended specifically to prevent large-scale foreign issuance of króna-denominated bonds (called glacier bonds), which could cause instability in and of itself, but they also aim to limit excessive speculation and position-taking in foreign exchange transactions that are generally conducive to undermining foreign exchange market stability.

According to Article 10 of the Foreign Exchange Act, financial undertakings, payment institutions, electronic money institutions, and currency exchange centres with operations in Iceland, as well as those that act as intermediaries in foreign exchange transactions, are obliged to report all foreign exchange transactions, incoming or outgoing cross-border capital transfers, and incoming or outgoing cross-border payments in domestic and foreign currency to the Central Bank of Iceland in the form decided by the Bank. According to the Rules on General Reporting Requirements pursuant to the Foreign Exchange Act, no. 861/2022, parties other than domestic commercial banks are exempt from these reporting requirements, whereas domestic commercial banks must satisfy them by means of regular disclosures to the Central Bank. Furthermore, domestic legal entities are obliged to notify the Central Bank expressly of specified transactions that take place without the intermediation of the aforementioned obliged entities by submitting a form via the data submittal system on the Central Bank’s service page, or via e-mail sent to ge.gagnaskil@sedlabanki.is.

According to Rules no. 412/2022, commercial banks are required to submit monthly reports on derivatives transactions involving the Icelandic króna against foreign currency. It should be noted that this disclosure does not take the place of information submitted to trade repositories according to the Act on Derivatives Trading, Centralised Counterparties, and Trade Repositories, no. 15/2018.