30 October 2008

Foreign exchange market

Because of the unusual circumstances that arose in the Icelandic banks’ operations in October, interbank transactions in foreign currency were interrupted. The three commercial banks had previously acted as market makers in that market in accordance with regulatory provisions on bid frequency, price formation, and other issues.


In response to the interruption in currency market operations, the Central Bank established an interim currency auction market, which was described in the announcement appearing on the Bank’s website on October 15. This new market includes a larger number of financial undertakings than participated in the previous interbank market, but these parties do not have market making duties. Prices and results of transactions are published daily on the Central Bank website.

In the view of the Central Bank, it should be possible to increase trading volume and strengthen price formation on the currency auction market. For this reason, exporters and other owners of foreign currency are particularly encouraged to offer it for sale on this market. They may do so by contacting financial undertakings that engage in transactions with the Central Bank[1] and asking them to intermediate in presenting their offers.

Off-market price formation obstructs healthy currency trading practice and undermines efforts to restore normal foreign exchange market functioning. In addition, off-market trading is non-transparent and entails potential risks for participants.

[1] Financial undertakings that have operating licences pursuant to Article 4, Paragraph 1, Subparagraph 1, 2, 3, or 4 of the Act on Financial Undertakings, no. 161/2002, can establish a current account with the Central Bank of Iceland and engage in transactions with the Bank. The following undertakings have established such accounts: NBI (New Landsbanki), New Glitnir Bank, New Kaupthing Bank, Straumur Investment Bank, Sparisjóðabankinn (Icebank), Byr sparisjóður (Byr Savings Bank), Sparisjóður Reykjavíkur og nágrennis (Reykjavík Savings Bank – SPRON), Sparisjóðurinn í Keflavík (Keflavík Savings Bank), Sparisjóður Suður-Þingeyinga (Sudur Þingeyingar Savings Bank), Sparisjóður Strandamanna (Strandir Savings Bank), Sparisjóður Vestmannaeyja (Westman Islands Savings Bank, Sparisjóðurinn Dalvík (Dalvík Savings Bank), Sparisjóður Höfðhverfinga (Höfðahverfi Savings Bank), VBS Investment Bank, MP Investment Bank, Saga Capital, Askar Capital, Frjálsi Investment Bank, Lánasjóður sveitarfélaga (Municipality Credit Iceland Plc), Borgun, and Valitor.