Markets

In performing its role, the Central Bank of Iceland may need to conduct transactions in or supervise specified financial markets. The Central Bank supervises the interbank foreign exchange market and the interbank market for krónur (REIBOR). The Bank intervenes in the interbank foreign exchange market, buying or selling krónur in exchange for euros when warranted. Every day, the Central Bank lists the official exchange rate of the Icelandic króna, as well as interest rates in the interbank market for krónur and the reference interest rate for the Icelandic krónur. When the Bank determines the interest rates on its transactions with financial institutions, it affects interest rates in the interbank market for krónur.

The Bank is a participant in the Nasdaq OMX trading system and keeps track of the securities market. The Bank is authorised to trade in the secondary bond market if it deems such trading consistent with its objectives.

 

The main purposes of the Central Bank of Iceland’s market activities are to support monetary policy transmission, thereby supporting price stability, and to preserve financial stability.

 

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  • Market activities

    Market transactions in support of monetary policy

    The objective of transactions undertaken in support of monetary policy is to steer the supply of liquidity in circulation at any given time, affect interbank market interest rates, and thereby promote the transmission of monetary policy across the yield curve in order to achieve the Bank’s price stability objective.

    Decisions on applying the Central Bank's monetary policy instruments are taken by the Monetary Policy Committee; cf. Article 9 of the Act on the Central Bank of Iceland.

     

    Market transactions in support of financial stability

    The objective of market transactions undertaken in support of financial stability lies in providing counterparties access to liquidity in response to an unexpected and temporary liquidity shortage that could affect market efficiency or payment intermediation, or could otherwise cause instability.

    Decisions on the application of the Central Bank’s financial stability policy instruments are taken by the Financial Stability Committee; cf. Article 12 of the same Act.

  • Rules on Central Bank of Iceland Facilities for Financial Undertakings

    The Central Bank sets rules on transactions between financial institutions and the Bank. The rules currently in effect are the Rules on Central Bank of Iceland Facilities for Financial Undertakings, no. 1200/2019, with subsequent amendments.  The rules stipulate, among other things, who may be counterparties in transactions with the Central Bank, what types of transactions may take place, and what type of collateral the Bank deems eligible for loan facilities. The rules are reviewed and amended as needed.

  • Counterparties in transactions with the Central Bank

    Counterparties in transactions with the Central Bank are commercial banks and savings banks. Icelandic branches of foreign financial institutions may also conduct transactions with the Central Bank.  Although financial institutions are authorised to conduct transactions with the Bank, they are free to choose whether or not to do so.

  • Overnight loans and current accounts

    Overnight loans are loans that mature on the following business day. Their purpose is to ensure that interbank payment system participants always have a positive end-of-day balance. Overnight loans are granted against collateral deemed eligible by the Central Bank. 

    They bear higher interest rates than other loan facilities. Overnight lending rates form the ceiling of the Central Bank interest rate corridor and the ceiling for overnight rates in the interbank market.  Commercial banks and savings banks may hold deposits with the Central Bank, which bear interest at the current account rate. The Bank pays interest on the entire balance, irrespective of the amount. Current accounts are subject to the Rules on Current Accounts in the Central Bank of Iceland, no. 18/2022. 

    Part A Government-owned institutions may hold current accounts with the Central Bank. 

    It is prohibited to overdraw accounts with the Central Bank.

  • Weekly market transactions

    On Wednesdays, the Central Bank invites counterparties to participate in its market transactions. 

    For monetary policy transmission, market conditions determine whether the Bank offers loans or term deposits to financial institutions. The Bank adheres to the general rule of not offering loans and term deposits at the same time; however, in January 2022 the Bank opened a special liquidity window through which counterparties may take fourteen-day collateralised loans so as to preserve financial stability. In exceptional cases, the Bank may deviate from the general rule of not offering loans and term deposits simultaneously if it deems such deviation necessary. 

    Financial institutions’ liquidity position can change markedly from day to day, owing in part to activity on Treasury accounts. Monthly wage payments increase the amount of krónur in circulation, for instance, and payments of taxes and levies to the Treasury reduce it.

  • Policy instruments

    The Bank may conduct transactions with counterparties via Central Bank facilities or in the markets. Differing circumstances can call for different types of facilities and policy instruments. Sometimes, facilities are not used for several years, yet they remain available if needed.

     

    Seven-day term deposits

    The Central Bank offers seven-day term deposits on Wednesdays. The interest rate on the deposits is 0.25 percentage points above the current account rate.  The deposits may be withdrawn before the end of the seven-day commitment period, subject to a redemption fee. After the market close on Tuesdays, the Central Bank announces the amount on offer the following day.  Counterparties wishing to participate in the auction submit bids, subject to a maximum of 60% of the total amount available. If the combined amount of bids submitted exceeds the total amount on offer, the total amount is divided among the counterparties in equal proportions. Seven-day term deposits have been offered on a weekly basis since May 2014.

     

    Fourteen-day collateralised loans

    On Wednesdays, Central Bank counterparties are invited to apply for fourteen-day collateralised loans through the liquidity window, at an interest rate 0.5 percentage points above the Bank’s seven-day collateralised lending rate; cf. the press release of 14 January 2022. Interest rates on loans taken through the liquidity window are variable and are based on Central Bank rates at any given time. Central Bank counterparties may apply for a loan of up to 5 b.kr. versus collateral according to the Bank’s list of assets deemed eligible as collateral for Central Bank facilities. Counterparties are prohibited from taking loans if they simultaneously hold term deposits with the Bank. Fourteen-day collateralised loans have been offered each week since January 2022. 

     

    Minimum reserve requirements

    The Central Bank imposes reserve requirements on entities subject to such requirements, mainly deposit-taking institutions. Reserve requirements are provided for in the Rules on Minimum Reserve Requirements, no. 585/2018, and Rules no. 1218/2019 amending the Rules on Minimum Reserve Requirements, no. 585/2018. Reserve requirements are satisfied via financial institutions’ reserve accounts with the Central Bank.  The minimum reserve requirement is calculated as a percentage of the reserve base, which comprises deposits, plus bonds with a residual maturity of two years or less and issued by the financial institution concerned. The calculation is based on the average reserve base for the two months immediately preceding. The reserve amount is the requirement that an entity subject to reserve requirements must maintain on a daily basis over the reference period (reserve maintenance period), which extends from the 21st day of the month through the 20th day of the following month. The minimum reserve requirement is divided into a fixed reserve requirement and an average maintenance requirement.

    Since 21 March 2020, the minimum reserve requirement has been 1% of the reserve base, and only the fixed reserve requirement has been imposed.

    Statistics on minimum reserve requirements

    Information on minimum reserve ratios

     

    Secondary market purchases of Treasury bonds

    According to Article 20 of the Act on the Central Bank of Iceland, no. 92/2019, the Bank may purchase or sell Government-guaranteed securities or other sound securities in the secondary market so as to achieve its monetary policy objectives. The Bank’s bond market transactions affect liquidity: the amount of krónur in circulation increases if the Bank buys Treasury bonds in the market, and it decreases if the Bank sells them. The Central Bank has not been an active participant in the bond market but commenced such activity in May 2020, following an announcement by the Monetary Policy Committee. In August 2021, the Committee decided to stop submitting bids for the time being.

     

    Foreign exchange market transactions

    The Central Bank can conduct transactions with market makers in the interbank foreign exchange market in order to mitigate exchange rate volatility as it deems necessary, to deepen the market, or to improve market efficacy. The Bank has both intervened in the market and conducted regular, preannounced transactions. The amount of krónur owned by market makers increases if the Bank buys foreign currency, and it decreases if the Bank sells currency. The Bank’s foreign currency transactions therefore affect liquidity in circulation unless mitigating action is taken. The Central Bank publishes interbank foreign exchange market turnover data on the Statistics pages of its website.

     

    Other policy instruments

    The Central Bank has other policy instruments at its disposal in addition to those mentioned above, chiefly to include the following:  

    • The Bank may grant loans for both shorter and longer periods, but all loans that it grants are collateralised, as the Bank may not loan funds except against collateral that it deems acceptable.  The seven-day collateralised lending rate is at the centre of the interest rate corridor. 
    • Repurchase (repo) transactions are contracts made between two parties who agree on the purchase or sale of securities that the Bank deems eligible for such transactions. A repo agreement has a predetermined maturity date, at which time the transaction is reversed.  The Central Bank has not engaged in such transactions for a long time. 
    • The Bank can issue marketable securities in the form of bonds and bills and can sell them to counterparties. The securities are electronically registered at the securities depository, and their terms are set at the time of each issue. 
    • The Bank can offer term deposits for short or long periods. Term deposits have the same impact on liquidity as bonds and bills; i.e., the Central Bank draws liquidity out of the financial system.

  • The Central Bank and the Treasury

    According to the Act on the Central Bank of Iceland, the Bank serves as the commercial bank for the Treasury.  Both the Treasury and various Government institutions are authorised to hold current accounts with the Central Bank. Interest rates on Government institutions’ current accounts are the same as those on financial institutions’ current accounts with the Central Bank. The Treasury is prohibited from overdrawing its accounts with the Central Bank.

In performing its role, the Central Bank of Iceland may need to conduct transactions in or supervise specified financial markets.

 

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  • Interbank foreign exchange market

    The exchange rate of the Icelandic króna is determined in the interbank foreign exchange market, which is open from 9:15 hrs. to 16:00 hrs. on business days. In addition to the Central Bank of Iceland, three financial institutions are authorised to participate in the foreign exchange market and are designated as market makers. The foreign exchange market is governed by the Central Bank of Iceland’s Rules on the Foreign Exchange Market, no. 600/2020.

    The price of the Icelandic króna versus the euro is determined in the foreign exchange market, where market makers pledge to submit bid and ask quotes. The quotes are published in the Bloomberg information system. The Central Bank keeps records on market turnover and publishes the figures on its Statistics pages.

     

    Exchange rate listing

    The Central Bank lists the exchange rate of the Icelandic króna against foreign currencies at 14:15 hrs. Central European Time. The listing provides a snapshot of the market at the time the listing is posted. The reference exchange rate is published on the Bank’s website each business day at 16:00 hrs. Icelandic time.

     

    General information on the foreign exchange market

    • The market is open from 09:15 hrs. to 16:00 hrs. on weekdays.
    • Financial institutions act as market makers in the market:
      • Arion Bank hf.
      • Íslandsbanki hf.
      • Landsbankinn hf. 
    • The trading currency is the euro.
    • Each quote is submitted by market makers in units of one million euros.

     

    The Central Bank of Iceland:

    • Is a participant in the market.
    • Is not a market maker and therefore is not required to maintain active bid-ask quotes.
    • May conduct transactions with market makers at any time during the market’s opening hours.
    • Performs a supervisory role.

  • Interbank market for krónur

    The interbank market for krónur is a market for unsecured short-term deposits and lending between credit institutions. It was established in June 1998. It operates on the basis of the Rules on Interbank Market Transactions with Icelandic Krónur, no. 1196/2019, set by the Central Bank in cooperation with market participants.  

    The Central Bank’s role is solely to organise and operate the market, however. The Bank is not a participant in the market, as it is not authorised to grant unsecured loans. The market for krónur is also known as the REIBOR market, and interest rates in the market are called REIBOR rates. REIBOR is an abbreviation of Reykjavík interbank offered rate. 

     

    General information on the interbank market for krónur

    • The market is open from 09:15 hrs. to 16:00 hrs. on weekdays.
    • Financial institutions are participants in the market.
      • There are four market participants:
        • Arion Bank hf.
        • Íslandsbanki hf.
        • Landsbankinn hf.
        •  Kvika banki hf.
      • Market participants negotiate credit lines among themselves.
      • Market participants are obliged to issue binding quotes for deposit and lending rates for the following maturities: overnight (ON), one week (SW), one month (1M), three months (3M), and six months (6M).
      • Market agents pledge to update their binding interest rate quotes on interbank deposit and lending rates at intervals of no less than 10 minutes.
    • The maximum interest rate spread between deposits and loans in market participants’ quotes for periods of one month or longer is 100 basis points. Quotes for shorter periods are not subject to defined maximum interest rate spreads.

     

    The Central Bank of Iceland:

    • Is not a participant in the market.
    • Performs a supervisory role and keeps records on market transactions, which are published on the Statistics pages.
    • Lists daily interest rates in the interbank market for krónur for maturities ranging from overnight to six months. The listing takes place at 11:15 hrs. and is published on the Central Bank website shortly thereafter. 

    Further information on turnover in the interbank market for krónur can be found on the Bank’s Statistics pages.

  • Interest rate reference in Icelandic krónur (IKON)

    The Central Bank calculates and publishes the reference interest rate for the Icelandic krónur (Icelandic krónur overnight, or IKON) on its website. IKON is calculated as the weighted average of interest rates on unsecured overnight deposits held by obliged entities. The amount, interest rate, and commitment period are negotiated in each instance. The reference rate is published on the website by 11:00 hrs. each day.

    Where:

    N = Number of trades
    rk = Interest rate on transaction k
    vk = Amount of transaction k
    Vtot = Total amount of trade

    Data for the IKON interest rate reference are submitted by the commercial banks. The reference rate for Icelandic krónur is governed by the Rules on a Reference Interest Rate for Unsecured Deposits in Icelandic krónur, no. 370/2022.
    The calculation and publication of the weighted reference interest rate (IKON) are in compliance with the Principles for Financial Benchmarks issued by the International Organization of Securities Commissions (IOSCO).

    At the end of each quarter, the Central Bank publishes a summary of errors and deviations in reporting, irrespective of whether or not they have given rise to changes in the published reference interest rate.

Central Bank of Iceland counterparties and participants in the Bank’s interbank payment system may provide securities as collateral for authorised limits in payment systems and as security for collateralised loans when these are available.

Securities eligible as collateral for Central Bank facilities are subject to the provisions of Rules no. 1200/2019, with subsequent amendments. 

Settlement collateral in the form of securities provided for participation in payment systems is subject to the Central Bank rules on interbank payment systems as current at any given time; i.e., Rules no. 1030/2020.  

The Central Bank reserves the right to review its decision on eligibility of specified securities in light of the conditions prevailing at any given time.

Eligible securities for facilities and payment systems (updated weekly)

Eligible securites for facilities and payment systems ( updated weekly).csv

 

Assessment of securities values

In the valuation of securities as financial collateral for Central Bank facilities and participation in payment systems, a haircut shall be calculated on the reference price according to the table below:  

Haircut on reference price*



<2yr

2yr<5yr

5yr>
Bonds and bills issued by the Icelandic Treasury

1%

3%

5%

Government-guaranteed securities

1%

3%

5%

Covered bonds**
6%8%10%
 Other securities
 8% 10% 12%
 Mortgage bonds portfolio
 30%30% 30% 
 COVID support loans1%  1% 1%
 Terms deposit in payment system*** 1%  1%  1%

*No market making with bonds adds a 5% haircut

**When own securities are used, a 5% premium is added

***Terms deposit in payment system can only be used for minimum collateral requirement

 

If necessary, for example due to market conditions, the Central Bank may calculate further deductions or haircuts. The Central Bank reserves the right to reject an application for facilities if no agreement can be reached on the pricing of collateral.

Central Bank of Iceland Interbank Payment System

The Central Bank of Iceland’s interbank payment system is an independent system owned by the Central Bank. The system is subject to the Rules on the Central Bank of Iceland Interbank Payment System, no. 1030/2020, dated 22 October 2020. The interbank system is divided into two components, the gross settlement component (RTGS) and the retail component (EXP). The RTGS component handles large-value payments of 10 m.kr. or more that are transferred between customers of two financial institutions. In the RTGS component, real-time gross settlement is executed in Icelandic krónur. Transactions settled in the RTGS component include transactions between the Central Bank and deposit institutions, on the one hand, and transactions in the interbank foreign exchange market, on the other. The component also handles settlement for other important settlement systems, such as the securities settlement and retail payment systems.

Payments between financial institutions in amounts of less than 10 m.kr. are routed through the retail component of the system, EXP. Retail payments are settled in the RTGS component twice a day.

System operating hours

Each component of the interbank system has its own operating hours. The RTGS component is open for conventional payment intermediation between system participants’ customers between 09:00 hrs. and 16:30 hrs. on business days. If 31 December falls on a business day, the RTGS component of the system is open from 09:00-12:00 hrs. on that day.

The EXP component of the system is open 24 hours a day, seven days a week. Settlement of retail payments takes place twice a day, at 08:30 hrs. and 16:00 hrs.

Settlement of securities transactions is executed at the Nasdaq CSD securities depository five times a day, at 09:15 hrs., 10:30 hrs., 11:45 hrs., 14:00 hrs., and 15:20 hrs.

Settlement of securities transactions is executed at Verðbréfamiðstöð Íslands (VBM) three times a day, at 10:00 hrs., 13:30 hrs. and 15:30 hrs.

Participants

Participants in the Central Bank of Iceland’s interbank payment system may include domestic and foreign financial institutions approved by the Central Bank. Current participants are:

  • Arion Bank hf.
  • Clearstream Banking S.A. in Luxembourg
  • Euroclear Bank SA/NV in Belgium
  • Íslandsbanki hf.
  • indó sparisjóður hf.
  • Kvika banki hf.
  • Landsbankinn hf.
  • Sparisjóður Austurlands (East Iceland Savings Bank) hf.
  • Sparisjóður Höfðhverfinga ses.
  • Sparisjóður Strandamanna (Strandamenn Savings Bank) ses.
  • Sparisjóður Suður-Þingeyinga ses.
  • Central Bank of Iceland.

Participants and requirements for system participation

Chapter II of the Rules on the Central Bank of Iceland Interbank Payment System discusses participants and requirements for system participation.

The Central Bank of Iceland takes a decision on the membership of new system participants and exclusion from system membership.

Participants may be institutions as defined in Article 2, Item 2 of Act no. 90/1999 and other parties approved by the Central Bank, provided that they satisfy the requirements for participation in Article 4 of the Rules on the Interbank System.

Financial institutions established and licensed abroad that have operations in Iceland may only be granted membership of the interbank system if they are subject to supervision in their home state that is comparable to that provided for in the Act on Official Supervision of Financial Activities, no. 87/1998.

Intermediaries, settlement agents, and clearing institutions as provided for in Article 2, Items 3, 4, and 8 of Act no. 90/1999 may participate in the interbank system upon receiving approval from the Central Bank of Iceland. Their rights and responsibilities, as well as those of other indirect participants, shall be in accordance with Act no. 90/1999 and Articles 3 and 4 of the Rules, as applicable.

The Central Bank of Iceland is a direct participant in the interbank system.

Overdraft limits and settlement collateral

Participants enter into a written contract with the Central Bank concerning their overdraft limit in the interbank system. The limit applies to the participant’s combined balance in the system’s gross settlement and retail components. To cover the overdraft, the participant shall provide collateral that the Central Bank evaluates and approves. The amount of the collateral, adjusted for deductions, may not fall below the amount of the overdraft limit of the participant concerned.

Value of collateral

In assessing the value of securities and other collateral provided in connection with a collateral agreement and deemed satisfactory by the Central Bank, a haircut shall be calculated on the reference price. The haircut on securities and other eligible collateral is published on the Central Bank website. The Central Bank may calculate a haircut in excess of that posted on its website if the Bank considers this necessary; for instance, due to market conditions.

A list of interbank system collateral deemed eligible by the Central Bank is posted on the Central Bank website.

Special limitations apply to covered bonds. The limitations are as follows:

  • Covered bonds shall be issued in accordance with Act no. 11/2008.
  • The market value of the series shall be at least 5 b.kr., and it must be confirmed that this amount has been sold.
  • The collateral portfolio underlying the covered bonds must consist solely of bonds secured by residential property in Iceland.
  • Financial undertakings may provide as collateral up to 3 b.kr. market value from their own covered bond issues.
  • Covered bonds may secure a maximum of 50% of each participant’s overdraft limit in the interbank payment system.
  • The bonds must be subject to active market making.

Tariff

The Central Bank of Iceland determines the tariff for interbank system operations in accordance with Article 43 of the Act on the Central Bank of Iceland, no. 92/2019. The tariff is revised annually and published on the Central Bank website. Further provisions on fees shall be included in participants’ contractual agreements with the Central Bank of Iceland.

Information on Interbank Payment System tariff Participants pay an annual fee that is spread over twelve (12) months and direct-debited from participants’ accounts on the second business day of each month.

Oversight

Oversight of financial infrastructure in the Central Bank aims at promoting security, efficiency, and efficacy of core infrastructure in the Icelandic financial system, or systemically important financial market infrastructure, thereby safeguarding financial stability.