Markets

The Market Operations Department of the Central Bank implements monetary policy, as well as carrying out other domestic market activities, supervising markets, and participating in them as needed.

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 and buys or sells krónur in exchange for euros. Every day, the Central Bank lists the official exchange rate of the Icelandic króna, as well as interest rates in the market for krónur. The Bank affects interest rates in the interbank market for krónur when it determines the interest rates on its transactions with financial institutions.

The Central Bank is a participant in the Nasdaq OMX trading system and keeps track of the securities market without supervising it. The Bank is authorised to trade in the secondary bond market if it deems such trading consistent with its objectives.

 

 

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  • The objective of monetary policy implementation

    The objective of monetary policy implementation is to support monetary policy and ensure price stability. To this end, the Central Bank sets interest rates for its transactions with financial institutions and steers the supply of liquidity that it either offers to lend or borrows in weekly market transactions. With these activities, the Bank affects short-term interest rates in the interbank market for krónur, which then affect longer-term interest rates. The Monetary Policy Committee sets the interest rates for Central Bank transactions. Monetary policy objectives.

     

  • Rules on Central Bank of Iceland Facilities for Financial Undertakings

    Transactions between financial institutions and the Central Bank are subject to the Rules on Central Bank of Iceland Facilities for Financial Undertakings, no. 1200/2019, with subsequent amendments no. 854/2020 and no. 345/2020. 
    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 such transactions. The rules are revised and updated 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. Even though financial institutions are authorised to conduct transactions with the Central Bank, they do so at their own discretion.

     

  • Overnight loans and current accounts

    Overnight loans are loans that counterparties to Central Bank transactions have access to through the interbank payment system,  provided that they can submit collateral deemed eligible by the Bank. Overnight loans are granted until the following business day and bear interest rates that are higher and less favourable than the rates on other types of loans. Overnight interest rates form the ceiling for overnight rates in the interbank market for krónur. A counterparty can use an overnight loan in order to ensure that the balance on its accounts with the Bank is positive at the close of business and to fulfil its reserve requirements.

    Only deposit-taking institutions - commercial banks, savings banks, and Part A governmental institutions - are eligible to hold current accounts with the Central bank. Parties with current accounts may make deposits and withdrawals at their own discretion. The Bank pays current account interest rates on all current account balances. It is prohibited to overdraw a current account or other accounts with the Central Bank overnight. Current account interest rates form the floor for overnight rates in the interbank market for krónur.

    Overnight loans and current accounts are classified as standing facilities with the Central Bank.

     

  • Market transactions and liquidity management

    In order to achieve its monetary policy objective, the Central Bank of Iceland conducts market transactions with counterparties once a week, on Wednesdays. The objective of the transactions is to steer the supply of liquidity in circulation at any given time, thereby affecting interbank market interest rates. The Bank’s aim with these transactions is to keep interest rates in the interbank market for krónur as close as possible to the Bank’s key rate as defined at any given time. The Bank may conduct transactions more often than once a week if it considers it warranted.

    Market conditions determine whether the Bank offers loans or term deposits to financial institutions. As a general rule, the Bank does not offer both loans and deposits at the same time. In exceptional circumstances, the Bank may deviate from this rule if conditions warrant it, such as in April 2020, when the Bank announced the temporary collateralised loan facilities.

    Financial institutions’ liquidity position can change radically from day to day, due in large part to activity by the Treasury. Monthly wage payments increase the amount of krónur in circulation, and payments of withholding tax, value-added tax, and other taxes and levies to the Treasury reduce it.

  • Policy instruments

    The Central Bank’s policy instruments are the measures or transactions that can affect the behaviour of its counterparties in connection with defined objectives. References to the Bank’s policy instruments most often include reserve requirements and transactions conducted by the Bank. Sometimes, policy instruments are not used for several years, yet they remain available if needed.

     

    Seven-day term deposits
    On Wednesdays, the Bank offers seven-day term deposits. The interest rate on the deposits is 0.25 percentage points higher than the current account rate. The deposits mature in seven days and cannot be withdrawn during that period. 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 submitted bids exceed the total amount on offer, the bids are reduced pro rata. Seven-day term deposits have been offered on a weekly basis since May 2014.

     

    Seven-day and three-month collateralised loans
    For quite a while, seven-day collateralised loans were the Bank's main policy instrument. The interest rate on such loans is at the centre of the interest rate corridor. On 22 April 2020, the Bank resumed temporary issuance of collateralised loans. The Bank may grant loans for both shorter and longer periods, but all loans that it grants are collateralised, the Bank may not loan funds except against collateral in securities that it deems acceptable.

      

    Reserve requirements
    The Central Bank imposes minimum reserve requirements on counterparties, as one of its monetary policy instruments. The rules in effect are the Rules on Minimum Reserve Requirements, no. 585/2018, with subsequent amendments no. 1218/2019. Reserve requirements are satisfied via financial institutions’ reserve accounts with the Central Bank. The minimum reserve requirement is a 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 is from the 21st day of the month through the 20th day of the following month. The minimum reserve requirement divided into a fixed reserve requirement and an average maintenance requirement. The fixed reserve requirement obliges entities subject to minimum reserve requirements to hold a specified amount in a separate reserve account with the Central Bank at all times. When the Central Bank imposes an average maintenance requirement, the financial institution can adjust its fulfilment of the reserve requirement to short-term changes in its payment flows. But this does not change the fact that, over the maintenance period, a specified minimum balance must be held in the reserve account with the Central Bank – a balance that the institution would otherwise have been able to allocate to other uses. 

     Beginning on 21 March 2020, the minimum reserve requirement is 1% of the reserve base, and only the fixed reserve requirement is imposed. On 11 March 2020, the Bank’s Monetary Policy Committee decided to lower the average reserve maintenance requirement from 1% to 0% in order to ease the banks’ liquidity and give them greater scope to respond to changes in Iceland’s economic situation.

     More information about reserve ratios

    Statistics on minimum reserve requirements can be found here

     

    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. To that end, the Central Bank purchases bonds in the secondary market, in accordance with the statement issued by the Monetary Policy Committee on 23 March 2020. The objective of the purchases is to ensure monetary policy transmission throughout the yield curve, so that the more accommodative monetary stance is transmitted normally to households and businesses. The transactions commenced in May 2020, and the Bank has full flexibility to adjust the amounts, frequency, and execution of the purchases in order to ensure maximum efficacy.

     

    Foreign exchange market transactions
    The Central Bank may conduct transactions in the interbank foreign exchange market if it wishes to do so. The Bank has traded in the market in order to expand its international reserves, and it conducts trades in order to promote the attainment of the inflation target declared in 2001. If the Bank buys foreign currency, the amount of krónur owned by market makers increases, and if the Bank sells currency the amount of krónur owned by market makers decreases.  As a result, foreign currency transactions affect the Bank’s market activities.  The Central Bank publishes interbank foreign exchange market turnover figures on the Statistics pages of its website.

     

    Other policy instruments

    The Central Bank has other policy instruments at its disposal, chiefly to include the following:

    • Repurchase agreements (often called repo transactions) are agreements between two parties concerning the purchase or sale of securities. Central Bank will announce which securities are eligible for repo 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.

    • Certificates of deposit (CDs) are securities that the Central Bank can issue and sell to counterparties. CDs are issued in dematerialised form by a securities depository. The terms are determined for each issue. CDs have been issued both before and after autumn 2008. 

    • One-month term deposits. The structure is much the same as that for seven-day term deposits. Central Bank counterparties may submit bids to the Bank if they wish to participate in auctions of term deposits. The Bank notifies counterparties of the total amount available and the maximum bid amount. Participants submit bids specifying amount and interest rate. All participants in the auction are allocated amounts at the interest rate accepted for each auction. Bids featuring interest rates above the accepted rate are rejected. One-month term deposits were offered from June 2014 until June 2020.

     

  • The Central Bank and the Treasury

    It is stated in the Central Bank Act that the Bank is the commercial bank for the Treasury. The Treasury and various other Government institutions may hold current account 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.

     

 

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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 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, and only market makers have access to them. The Central Bank publishes turnover figures in the foreign exchange market on its Data website.

     The Central Bank lists the official exchange rate of the Icelandic króna against foreign currencies each business day at 14:15 hrs Central European Time (CET). The exchange rate listing provides a snapshot of the position in the market at the time the entry is made. The reference exchange rate will then be published on the Bank's website each business day at 16:00 hrs. Icelandic time.

     

    Main points about the interbank foreign exchange market

    • Opening hours: Weekdays 9:15-16:00 hrs.

    • Financial institutions are market makers in the foreign exchange market.

      • There are three market makers:

        • Arion Bank hf.

        • Íslandsbanki hf.

        • Landsbankinn hf.

      • Market makers are obliged to maintain active bid-ask quotes and update them at least every 30 seconds.

    • The trading currency is the euro.

    • The minimum trade amount is specified in the Rules on the Foreign Exchange Market. The trading amount is currently 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 hours of operation.

      • Carries out a supervisory role.

     

  • Interbank market for krónur

    The interbank market for krónur is an interbank 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. 805/2009, which the Bank adopted in cooperation with market agents.

    The Central Bank’s role, however, is merely to organise and operate the market. It is not a market participant, 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.

    • Opening hours: Weekdays 9:15-16:00 hrs.

    • 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 submit binding quotes for deposit and lending rates for the following periods: overnight (ON), one week (SW), one month (1M), three months (3M) and six months (6M).

      • Market participants 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.

      • Has a supervisory role and keeps track of trading in the market, which it then publishes with its statistical data.

      • Lists daily interest rates in the interbank market for krónur, with maturities ranging from overnight to 6 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 website: 

    Further information on the interbank market for krónur can be found in Monetary Bulletin 2002/3.

     

Parties are eligible for Central Bank of Iceland facilities and participants in the Bank’s real-time gross settlement (RTGS) system and netting system may provide collateral in the form of securities. 

Securities deemed eligible as collateral are subject to the Rules on Central Bank of Iceland Facilities for Financial Undertakings, no. 1200/2019, with subsequent amendments.

Securities used as settlement collateral for participation in payment systems shall be governed by the Central Bank rules in effect at any time: the Rules on the Real-Time Gross Settlement System, currently 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)

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>
Central Bank term deposits and certificates of deposit

0%

  

 
Bonds and bills issued by the Icelandic Treasury

1%

3%

5%
Government money market loans

1%

 

 
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; additional 5% haircut applied

**When using own bonds a 5% extra haircut is added

 

If necessary - for example, due to market conditions - the Central Bank my calculate further deductions. The Central Bank reserves the right to reject an application for a facility if no agreement is reached on the valuation 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.

In 2017, the Central Bank signed an agreement with South African provider SIA-Perago for the purchase and implementation of the new interbank system. Perago is a subsidiary of Italian company SIA. Both companies have participated in developing parallel systems for the central banks in the Nordic region. System implementation in Iceland was completed in October 2020.

System opening hours

Each component of the interbank system has its own opening 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.

Participants

Participants in the Central Bank of Iceland’s interbank payment system may include domestic and foreign financial institutions and government credit funds 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.

        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.