New Foreign Exchange Act and new Rules on Derivatives Trading
Parliament has recently passed a new Foreign Exchange Act, no. 70/2021, the bill of legislation for which was introduced this past February. The bill was prepared by a work group appointed by the Minister of Finance and Economic Affairs in September 2019. The group’s task was to conduct a comprehensive review of the regulatory framework for foreign exchange matters in Iceland, particularly the Foreign Exchange Act, the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions (also called the Offshore Króna Act), and rules set on the basis of these acts. The new law entered into force yesterday.
The new Foreign Exchange Act marks a turning point, as its passage removes the last of the capital account restrictions imposed in November 2008. Furthermore, the new Act is simpler, clearer, and more accessible, and the rules requiring that individuals, firms, and foreign investors submit notifications to the Central Bank have been eased.
As before, it is ensured that the Central Bank has at its disposal the measures needed to safeguard economic and financial stability if needed. The macroprudential measures that the Central Bank may take according to the new Act are as follows:
- Imposition of a special reserve requirement on inflows of foreign currency, similar to the one that was imposed in 2016-2019 and has been authorised by law.
- Adoption of rules on credit undertakings’ foreign currency-linked lending to borrowers that are unprotected against foreign exchange risk. This authorisation is unchanged from that found in previous legislation.
- Adoption of rules restricting derivatives transactions in which the Icelandic króna is specified in a contract against foreign currency. According to the comments on the bill of legislation, it was foreseen that some restrictions would be placed on derivatives trading on the basis of this authorisation. The Central Bank’s new Rules on Derivatives Trading no. 765/2021, which were approved at a meeting of the Financial Stability Committee yesterday, entail a significant expansion of previous authorisations for such transactions. More specifically, they authorise all derivatives transactions, irrespective of their purpose, but instead they place restrictions on the total amount of financial institutions’ derivatives transactions. The Rules take effect today.
Furthermore, the Act authorises the Central Bank, subject to Ministerial approval, to set rules that could, among other things, restrict or halt specified categories of capital movements or cross-border payments for up to 60 days, as well as requiring the repatriation of foreign currency. This authorisation applies only in emergencies that entail a severe risk that financial stability will be jeopardised by unrestricted movement of capital and other measures cannot be taken.
In addition to the above, the Offshore Króna Act is repealed with the passage of the new Foreign Exchange Act. This means that separate rules will no longer apply to offshore króna assets, and these assets will henceforth be subject to the same rules as other króna-denominated assets. As a result, it will be required to reverse the special restrictions provided for in the Offshore Króna Act, including the segregation and transfer of offshore króna assets to accounts subject to special restrictions (Article 4) and their transfer to administrative accounts with the Central Bank (Article 5). Furthermore, the encumbrances pursuant to Article 6 of that Act no longer apply. In the wake of the passage of the new Foreign Exchange Act, the Central Bank will call in the CBI2016 certificates of deposit issued in connection with the implementation of the Offshore Króna Act and will return to custodians the electronically registered securities that had been transferred to administrative accounts. The Central Bank will notify the parties involved and provide them with further detail on the execution of these transfers in the next few days.