A foreign exchange market is an international platform where currencies are bought and sold. The role of foreign exchange markets is to facilitate and manage the exchange of foreign currency between those who want to buy and to sell currency. The exchange rate of individual currencies is determined by trading in the foreign exchange market.
In Iceland, foreign exchange transactions take place on the one hand within financial institutions, particularly the large commercial banks, and on the other hand between the large banks in the interbank foreign exchange market. Each bank conducts foreign exchange transactions with its customers and mediates currency between them, but if those transactions result in a surplus or shortage of currency, the bank has the option of going to the interbank market to buy or sell currency, depending on what is deemed necessary at any given time.
Participants in the interbank foreign exchange market play the role of market makers in the market. Market makers undertake to continuously maintain indicative bid and offer spreads in euros against the Icelandic króna for a specified benchmark amount. This arrangement boosts liquidity in foreign exchange trading and ensures that the pricing of the króna against foreign currencies is active, visible and continuous. The interbank foreign exchange market is governed by the Central Bank of Iceland's Rules on the Foreign Exchange Market, no. 600/2020. The Central Bank manages turnover in the interbank foreign exchange market and publishes it monthly in the Bank's statistics.