
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
Rules on Central Bank of Iceland Facilities for Financial Undertakings
Counterparties in transactions with the Central Bank
Overnight loans and current accounts
Weekly market transactions
Policy instruments
The Central Bank and the Treasury
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
Interbank market for krónur
Interest rate reference in Icelandic krónur (IKON)
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 loans | 1% | 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.