What is restricted?
With the Rules on Foreign Exchange, no. 200/2017, which took effect on 14 March 2017, most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted. Since then, households and businesses have not been affected by the restrictions provided for under the Act. Restrictions on specified transactions are still in place, however, with the aim of reducing the likelihood of carry trade in connection with investments in connection with new inflows of foreign currency. This page discusses the restrictions currently in effect.
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Cross-border movement of domestic currency in certain cases
Exportation of securities issued in domestic currency
Exportation of securities issued in domestic currency is prohibited in the case of securities comparable to the investment options listed in Article 2, Items 1 and 3 of the Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 490/2016 – namely, the following:
- Bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
- 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 held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
Investments and measures for which payment is made from a Vostro account
Cross-border movement of domestic currency is prohibited in cases involving measures comparable to those listed in Article 2, Items 1-5 of the Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 490/2016, when payment is remitted by withdrawal from an account owned by a foreign financial undertaking (Vostro account) – namely, the following:
- Investments in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
- Investments 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 held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
- Deposits in domestic currency with deposit institutions in Iceland that bear annual interest of 3.00% or more.
- Investments in the equity of a company that invests or allocates funds, directly or indirectly, in the manner described in Items (a) and (b) above.
- Loans granted to a resident and used for investment for the benefit of the lending pursuant to Items (a)-(c) above.
Derivatives trading for purposes other than hedging
It is only permissible to conduct derivatives transactions with financial undertakings in Iceland, where domestic currency is used in a contract against foreign currency, for the purpose of hedging against risk, provided that a foreign exchange imbalance exists over the duration of the derivative contract and the Central Bank of Iceland has confirmed that the transaction is a hedging instrument. It is required that such hedging instruments reflect the foreign exchange imbalance, and contracts shall be amended accordingly if the premises for them change; i.e., underlying assets are sold or debts settled prior to maturity. Derivatives transactions are also subject to the condition that the contracts may not be transferred, directly or indirectly, to a third party prior to maturity.
The term derivatives transactions refers to transactions with financial instruments pursuant to Article 2, Paragraph 1, Items 2(d)-2(h) of the Act on Securities Transactions.
Derivatives transactions due to hedging in connection with bonds issued abroad in domestic currency do not fall under the above-described exemption.
The Central Bank may revoke its confirmation that a transaction is a hedging instrument if it concludes that the premises for the hedging no longer exist.
The contents of requests for confirmation according to the above shall be as is provided for in Article 13 of the Rules on Foreign Exchange, no. 200/2017.Requests for confirmation of derivatives trading for hedging purposes shall be sent in electronic form to the Central Bank at the e-mail address ge.gagnaskil@sedlabanki.is
Foreign exchange transactions without the intermediation of a financial undertaking
Foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking are prohibited.Cross-border lending and borrowing in certain cases
Borrowing and lending in foreign currency
Borrowing and lending in foreign currency between residents and non-residents are exempt from the restrictions laid down in the Foreign Exchange Act, except for loans in foreign currency granted by residents to non-residents, disbursed to a bank account with a financial undertaking in Iceland and allocated, directly or indirectly, to:
- Investments in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
- Deposits in domestic currency with deposit institutions in Iceland that bear annual interest of 3.00% or more.
- Investments 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 held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
- Investments in the equity of a company that invests or allocates funds, directly or indirectly, in the manner described above.
Repayments of loans in domestic and foreign currency between residents and non-residents are exempt from the restrictions provided for in the Foreign Exchange Act, except for repayments of foreign currency loans from residents to non-residents which are allocated, directly or indirectly, for the purposes described above.
Borrowing and lending in domestic currency
Borrowing and lending in domestic currency between residents and non-residents are exempt from the restrictions provided for in the Foreign Exchange Act, except for loans in domestic currency granted by residents to non-residents and disposed of, directly or indirectly, to:
- Investments in bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
- Deposits in domestic currency with deposit institutions in Iceland that bear annual interest of 3.00% or more.
- Investments 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 held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
- Investments in the equity of a company that invests or allocates funds, directly or indirectly, in the manner described above.
Repayments of loans in domestic and foreign currency between residents and non-residents are exempt from the restrictions provided for in the Foreign Exchange Act, except for repayments of domestic currency loans from residents to non-residents which are allocated, directly or indirectly, for the purposes described above.Settlement of transactions with financial instruments in certain cases
The use of foreign currency to settle transactions with the following financial instruments is prohibited:- Bonds or bills issued in domestic currency and electronically registered pursuant to the Act on Electronic Registration of Title to Securities.
- 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 held at deposit institutions in Iceland, if cash and deposits bearing annual interest of 3.00% or more constitute 10% or more of the funds’ assets.
- The equity of a company that invests or allocates funds, directly or indirectly, in the manner described in Items (a) and (b)