Capital flow measures

Temporary Provision III of the Foreign Exchange Act, no. 87/1992, cf. Act no. 42/2016 Amending the Foreign Exchange Act, authorised the Central Bank of Iceland to set rules, subject to prior approval by the Minister, providing for special reserve requirements due to new inflows of foreign currency in further specified cases. The purpose of the legislation was to provide the Central Bank of Iceland with a new policy instrument, commonly referred to as a capital flow management tool or capital flow management measure (CFM), so as to temper capital inflows to the country and affect the composition of such inflows.

The CFM is intended to reduce the risk that could accompany excessive capital inflows, thereby supporting domestic economic policy and contributing to macroeconomic and financial stability. The Central Bank of Iceland has, with Ministerial approval, set the Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 223/2019, which took effect on 6 March 2019 and supplanted the older Rules no. 490/2016 on the same subject, which took effect on 4 June 2016. The Rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit. The special reserve base is new inflows of foreign currency in connection with specified types of capital, particularly to include new investment in deposits and in electronically registered bonds and bills. In addition, new inflows in connection with loans granted for investment in these types of capital can form the special reserve base. The Rules also set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit at 0% and specify the Icelandic króna as the settlement currency.

The Act states that the holding period may range up to five years and that the special reserve ratio may range up to 75%; however, the Rules set the holding period at one year and the special reserve ratio at 0%. The Rules on Special Reserve Requirements for New Foreign Currency Inflows can be found here.

The information below could change in the event of amendments to the Foreign Exchange Act and rules set on the basis of the Act.

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  • Special reserve requirement

    It is required to deposit funds deriving from new inflows of foreign currency pursuant to Rules no. 223/2019; cf. Temporary Provision III of the Foreign Exchange Act, no. 87/1992.

    The special reserve requirement is created when a special reserve base develops, as is stated in Article 3 of the Rules. In spite of this, an individual who is the registered owner and the beneficial owner of the funds in question is authorised to allocate new inflows of foreign currency pursuant to Article 3 of the Rules, up to a combined total of 100,000,000.00 kr. or the equivalent, without incurring a special reserve requirement according to the Rules.

    The special reserve requirement cannot be created until new inflows of foreign currency are converted to domestic currency. A deposit institution that sells krónur in exchange for foreign currency is not obliged to report a possible special reserve requirement according to the Rules. The special reserve requirement can be created for counterparties to such transactions if the domestic currency received for the sale of new foreign currency is invested as is specified in Article 3, Items 1-5 of the Rules. A special reserve requirement in connection with lending is created only if loans are granted to a resident of Iceland and the borrowed funds are used to invest in domestic currency, for the benefit of the lender, in the instruments specified in Article 3, Item 5 of the Rules.


  • Implementation of the special reserve requirement

    The special reserve requirement shall be satisfied within two weeks of its establishment, in either of the following ways:

    1. The entity subject to special reserve requirements deposits the special reserve amount, which is the special reserve base multiplied by the special reserve ratio, to a special reserve account with a deposit undertaking in Iceland (an account identified with ledger code 24).

    2. A special reserve broker, which is a deposit institution that is a participant in the Central Bank real-time gross settlement system, enters into a repurchase transaction for the special reserve amount.

    A repurchase (repo) transaction is a purchase from the Central Bank, by a special reserve broker, of a Central Bank certificate of deposit (a debt instrument issued by the Central Bank of Iceland) for the special reserve amount, undertaken upon the initiative of an entity subject to the special reserve requirement, with an option to sell it to the Central Bank at the end of the holding period, at a price determined by the interest rate on the certificate of deposit.


  • What is ledger code 24 and capital flow account?

    One of the ways in which an investor can satisfy the special reserve requirement is by depositing the special reserve amount to a special reserve account, which is identified with the ledger code 24 (colloquially referred to as „HB24“).

    Capital flow accounts are accounts held by deposit undertakings at the Central Bank of Iceland and are used by deposit undertakings to satisfy their reserve requirements pursuant to Rules 223/2019. The balance on a deposit undertaking’s capital flow account with the Central Bank must be at least equal to the total balance on all special reserve accounts with the deposit undertaking concerned.


  • Repurchase transactions with certificates of deposit

    The certificates of deposit purchased by a special reserve broker via repurchase agreement with the Central Bank of Iceland are debt instruments issued by the Central Bank; cf. Temporary Provision III of the Foreign Exchange Act, no. 87/1992. The certificates of deposit bear no maturity date but are callable by the Central Bank of Iceland in accordance with the provisions of the instrument concerned. If the Central Bank exercises the call-in provision, the special reserve broker’s option to sell according to a repurchase agreement with the certificate of deposit concerned shall expire. Certificates of deposit will not be delivered to special reserve brokers except in fulfilment of a repurchase agreement between the special reserve broker and the Central Bank of Iceland. A special reserve broker’s option to sell according to a repurchase agreement entails the right, but not the obligation, to exercise the sell option. The Central Bank is required to honour a special reserve broker’s sell option, provided that other requirements provided for in Rules no. 223/2019 are satisfied.

    In other respects, the Central Bank of Iceland shall determine the terms and rates on certificates of deposit and repurchase agreements.


  • How is the special reserve amount calculated?

    New inflows of foreign currency in connection with the types of capital specified in Article 3, Items 1-5 of Rules no. 223/2019 create the special reserve base, not the amount disposed of in accordance with the same provisions. As an example, if the special reserve ratio is 40%, the amount disposed of in accordance with Article 3, Items 1-5 of the Rules may only total 60% of the new inflows of foreign currency imported to Iceland. The calculation of the special reserve amount is based on the special reserve base and the special reserve ratio (special reserve amount = special reserve base * special reserve ratio). The following examples assume that the special reserve ratio is 40%, but according to the Rules, the ratio is currently 0%.

    Example 1: An investor that imports the equivalent of 100 kr. to Iceland and wishes to invest in electronically registered Treasury bonds subject to special reserve requirements must deposit 40 kr. to a Code 24 account for one year, irrespective of the duration of the investment. Therefore, the investor can invest 60 kr. in the bonds. A year later, the special reserve amount (40 kr.) is available for withdrawal and can either be invested in Iceland or converted to foreign currency and exported.

    Example 2: An investor imports new foreign currency to Iceland and wishes to invest 100 kr. in bonds. In order for the investment in bonds to equal 100 kr. and to equal 60% of the inflows, the total inflows must equal 100/(1-40%) = 167 kr. In this example, 67 kr. would be deposited to a Code 24 account for one year, and the financial institution would deposit a corresponding amount to a capital flow account with the Central Bank. A year later, the special reserve amount (67 kr.) is available for withdrawal and can either be used for further investment in Iceland or converted to foreign currency and exported.

    Example 3: An investor that imports new foreign currency in an amount equivalent to 100 kr. and deposits it to a domestic currency account with a deposit institution in Iceland is not required to deposit any funds to a special reserve account if the interest rate on the deposit account is less than 3.00%. If the interest rate is 3.00% or more, however, the investor must deposit 40 kr. to a special reserve account for one year.
  • How long is the holding period?

    The holding period is 12 months for all types of capital listed in Article 3, Items 1-5 of Rules no. 223/2019. The holding period begins when the special reserve requirement is satisfied. At the end of the holding period, the special reserve amount is available for withdrawal from the special reserve account or for exercise of the option to sell provided for in the repurchase agreement, and it is thereby no longer subject to the special reserve requirement pursuant to the Rules. It is prohibited to release the special reserve amount or amend a repurchase agreement during the holding period. In spite of this, it is permissible to transfer a repurchase agreement between special reserve brokers, provided that such transfer is reported simultaneously.

    In the case of reinvestment, however, the holding period varies according to whether the capital used for reinvestment was previously subject to special reserve requirements pursuant to the Rules or not. If the capital was previously subject to special reserve requirements, the holding period of the reinvestment begins the day that the holding period for the original investment began. Otherwise, the holding period begins the day that the special reserve amount connected to the reinvestment is deposited to a special reserve account.

    Example 1: New inflows of foreign currency are converted to 100 kr. and invested in equity securities on 1 July 2016. There is no special reserve requirement because equities are generally exempt from special reserve requirements. On 1 September 2016, the investor sells the equity securities and buys Treasury bonds, which are subject to special reserve requirements. The investor must deposit 40 kr. to a special reserve account for one year, and the holding period begins on 1 September 2016.

    Example 2: New inflows of foreign currency are converted to 100 kr. on 1 July 2016; 60 kr. are invested in a Treasury bond maturing in 2025 (RIKB 25 0612), and 40 kr. are deposited to a special reserve account for one year. On 1 September 2016, the Treasury bond is sold. Half of the sales proceeds are invested in a Treasury bond maturing in 2020 (RIKB 20 0205) and the other half in equity securities. No new special reserve requirement is created, and the holding period is considered to have begun on 1 July 2016.
  • How are new inflows defined under Rules no. 223/2019?

    Foreign currency entering Iceland after 4 June 2016. Balances on deposit in foreign currency accounts with domestic financial undertakings dating from before 5 June 2016, export revenues, and other foreign currency subject to repatriation requirements, cf. Article 13(l) of the Foreign Exchange Act, are not considered new inflows of foreign currency. Article 3 of Rules no. 223/2019 specifies which new inflows of foreign currency create a special reserve base for an entity subject to special reserve requirements, particularly in connection with new investments and their reinvestment in bonds and bills issued electronically in domestic currency, as well as inflows deposited to deposit accounts in some instances (see also Article 3 of the Rules).
  • Are balances on Code 24 accounts exempt from the so-called bank tax?

    Yes. According to Temporary Provision II of the Act on a Special Tax on Financial Undertakings, No. 155/2010, with subsequent amendments, such balances that are held by taxable entities may be deducted from the tax base.
  • Are balances on Code 24 accounts exempt from conventional reserve requirements?

    Yes. According to Rules no. 512/2016 Amending Rules no. 870/2015 on Minimum Reserve Requirements, balances on Code 24 (and Code 21) accounts may be deducted from the conventional reserve base.
  • What is the settlement currency for the special reserve amount and the corresponding amount in capital flow accounts?

    The settlement currency is the Icelandic króna, but the Central Bank is authorised to amend the Rules, subject to approval by the Minister, and provide for another settlement currency.
  • How may owners of special reserve amounts dispose of these funds at the end of the 12-month holding period?

    The special reserve amount is available for disposal from the special reserve account, or for exercise of the sell option according to the repurchase agreement, at the end of the holding period, in accordance with the provisions of the Foreign Exchange Act. The amount available for disposal is not subject to special reserve requirements according to Article 7 of the Rules.
  • How is the notification requirement for new inflows handled?

    With the assistance of a financial institution in Iceland, entities subject to special reserve requirements must notify the Central Bank of Iceland of the disposal of new inflows of foreign currency covered by Rules no. 223/2019. The notification shall be made within two weeks of the date the new inflows of foreign currency are converted to Icelandic krónur or the reinvestment has taken place.
    • Financial institutions already have a process in place for notifying the Central Bank of new investments and their reinvestment, and in cases where they fall under Article 3, Items 1, 3, and 4 of the Rules, financial institutions are also obliged to assist entities subject to special reserve requirements in notifying the Bank of the aforementioned disposal of new inflows of foreign currency.
    • In cases where new inflows of foreign currency are in connection with capital according to Article 3, Item 2 of the Rules (that is, deposits to accounts bearing 3.00% annual interest or more, as is explained in this Item), financial institutions must assist the entities in question in notifying the Central Bank in a corresponding manner, within two weeks. Such assistance could entail, for instance, pointing out the special reserve requirements to entities subject to such requirements, giving advice, and acting as an intermediary in the notification process.
    • In instances involving new inflows of foreign currency in connection with capital according to Article 3, Item 5 of the Rules, which covers loans granted to resident entities and used for investments, for the benefit of the lender, in electronically registered bonds or bills issued in domestic currency or deposits to accounts bearing 3.00% annual interest or higher (as is further specified in Article 3, Item 5 of the Rules), financial institutions must assist entities subject to special reserve requirements in notifying the Central Bank of Iceland in a corresponding manner, within two weeks. Such assistance could entail, for instance, pointing out the special reserve requirements to entities subject to such requirements, giving advice, and acting as an intermediary in the notification process.


    According to Article 10 of the Rules, deposit institutions must notify the Central Bank of Iceland, on the same business day, of deposits of special reserve amounts to Code 24 accounts and must also, on the same business day, deposit 100% of the special reserve amount held in their Code 24 accounts to their capital flow accounts with the Central Bank of Iceland.

    According to Article 10 of the Rules, deposit institutions must also notify the Central Bank of purchases of Central Bank certificates of deposit pursuant to Article 6 of the same Rules.

  • Where shall notification of the disposal of new inflows be sent?

    New investments and their reinvestments shall be reported to the Central Bank by e-mail at: nyfjarfesting@sedlabanki.is.

    Other notifications relating to these Rules shall be sent to the e-mail address: HB24@sedlabanki.is.