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. With the passage of the Act, the previous Foreign Exchange Act, no. 87/1992, was repealed and the remaining capital account restrictions, which pertained to derivatives transactions, were lifted. Also repealed was the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016 (referred to informally as the Offshore Króna Act); therefore, there are no special rules governing so-called offshore króna assets, which are now subject to the same rules as other króna-denominated assets. The passage of the Foreign Exchange Act also provided for the repeal of various rules and regulations pertaining in some way to the capital controls. The new Foreign Exchange Act therefore marks a turning point, as its passage removes the last of the capital account restrictions imposed in November 2008, in the immediate aftermath of the economic crisis.
The new Foreign Exchange Act is discussed in a Box appearing in a recent issue of the Bank’s Financial Stability report: Financial Stability 2021/2.
Intermediation in foreign exchange transactions
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.
Information disclosure to the Central Bank
Disclosure according to Article 10 of the Foreign Exchange Act
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 email@example.com. Below are links to rules and guidelines pertaining specifically to this information disclosure.
- Rules on General Reporting Requirements pursuant to the Foreign Exchange Act, no. 861/2022
- Guidelines for reporting requirements pursuant to Article 10 of the Foreign Exchange Act (forthcoming)
For several years before Rules no. 861/2022 took effect, this notification requirement was satisfied with the entry of transactions to the so-called GV system, which was operated by the Central Bank in cooperation with the Icelandic Banks' Data Centre (RB). Information on that system can be found here:
- Entry to the Central Bank’s GV information system (description of transaction), dated 30 December 2016
- Central Bank classification codes: reason codes for foreign exchange transactions, for use in the Bank’s GV system, dated 25 October 2016
Please note that obliged entities’ disclosure of information according to Article 10 of the Foreign Exchange Act is under review, and a new set of classification codes is expected in coming months.
Commercial banks’ reports on derivatives transactions
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.
- Guidelines for Rules no. 412/2022 (forthcoming)
- Form (schema) for reporting derivatives transactions according to Rules no. 412/2022 (forthcoming)
The new Foreign Exchange Act, no. 70/2021, entered into force in June 2021. It superseded the Foreign Exchange Act, no. 87/1992, with subsequent amendments, which was in force until that time.
- Foreign Exchange Act, no. 70/2021
- Bill of legislation passed as the Foreign Exchange Act
Over the years, the Central Bank has set various rules based on the authorisations found in the Foreign Exchange Act, no. 87/1992, and the superseding Foreign Exchange Act, no. 70/2021. The following Rules are still in effect:
- Rules on Derivatives Transactions in which the Icelandic Króna is Specified in a Contract Against Foreign Currency, no. 412/2022
- Rules on Foreign Exchange, no. 600/2020
- Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 223/2019
- Rules on Foreign Exchange Balance, no. 784/2018
- Rules on the Obligation to Provide Information in respect of Foreign Exchange Transactions and Cross-Border Capital Movements, no. 13/1995
Information on foreign exchange matters is available upon request. Queries should be sent by e-mail to firstname.lastname@example.org.