12 March 2017

Amended Rules on Special Reserve Requirements for New Foreign Currency Inflows

Central Bank of Iceland

Rules no. 201/2017 amending Central Bank of Iceland Rules no. 490/2016 on special reserve requirements for new foreign currency inflows were published on Central Bank of Iceland website today. The Rules will be published in the Law and Ministerial Gazette tomorrow and will take effect the following day, 14 March 2017. The amendments are made concurrent with the issuance of new Rules on Foreign Exchange, which are also published on the Central Bank website today and which provide for liberalisation of capital controls on households and businesses. Lifting the restrictions that have hitherto been applied to foreign exchange transactions and cross-border movement of capital between Iceland and other countries opens up new possibilities for carry trade, which necessitates a response in the form of amendments to Rules no. 490/2016. The amendments are intended to ensure the effectiveness of the Rules and to support the objectives therein.
In view of this, a change has been made to the special reserve base provided for in Rules no. 490/2016, so that deposits that are used, directly or indirectly, to invest in the following will create a special reserve base for parties subject to special reserve requirements:
1. In bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
2. In unit share certificates of funds that invest in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities, or that own domestic currency deposits, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
3. In the equity of a company that is used, directly or indirectly, for the above-described investments.
This change is intended to support the objective of the Rules, which is to restrict undesirable inflows of foreign-denominated capital that could create systemic risk. For the same purpose, a change is also made to the special reserve base in connection with loans to residents, with the aim of limiting the special reserve requirement for loans used to invest in unit shares of funds comparable to those listed in connection with other investments that create the special reserve base.
In addition are various other changes deriving from the above-mentioned amendments, in connection with entities subject to special reserve requirements, special reserve ratios, and implementation of the special reserve requirement. Other changes centre on changes in wording.

The text of the Rules can be found on the Central Bank of Iceland website. As is mentioned above, they take effect on Tuesday, 14. March 2017.

Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.


No. 7/2017
12 March 2017