01 April 2022

IKON is the new alternative reference rate for the Icelandic króna

The Central Bank has begun daily publication of a new reference rate for the Icelandic króna, called IKON (Icelandic króna overnight). Work on a formulating the new reference rates has been underway, with the cooperation of the commercial banks, since year-end 2019. The preparatory work included examining the possibilities in Iceland for calculating an alternative reference rate that would reflect rates in actual transactions undertaken by financial institutions. The conclusion was that there is an active market for term deposits, where financial institutions accept deposits at fixed terms and for fixed maturities. The overnight market is the most active; therefore, the new reference rate for Iceland is based on market rates for overnight term deposits. A more detailed explanation of the calculations can be found here. Since year-end 2021, listed IBOR reference rates have declined in number, as they have generally been discontinued. This trend is expected to continue. New reference rates have been introduced instead, including SOFR, SONIA, ESTR, NOW, and others. Unlike IBOR rates, the new reference rates are based on actual transactions. This is in line with a recent EU Regulation, no. 2016/11, called the Benchmark Regulation (BMR), which has taken effect within the European Economic Area (for further information, see the Bank’s 11 November 2020 press release).

Rules on reference rates for unsecured deposits in Icelandic krónur will take effect on 1 April 2022. Each day, the Central Bank will publish the weighted average for overnight trades, together with turnover and trade count data. Further information on interest rates can be found here.

No. 9/2022
1 April 2022