Central Bank of Iceland to hold foreign currency auction
The Central Bank of Iceland is offering to purchase euros in exchange for Icelandic krónur for long-term investment in the Icelandic economy, or in exchange for payment in Treasury bond series RIKS 33 0321. Furthermore, the Central Bank of Iceland advertises herewith for bids on the sale of Icelandic krónur for cash payment in foreign currency. The three auctions, which are scheduled for 29 August 2012, are an element in the removal of restrictions on movement of capital as set forth in the Bank’s capital account liberalisation strategy of 25 March 2011, and in the Bank’s Terms of foreign exchange transactions according to the Investment Programme for capital account liberalisation, dated 18 November 2011, with subsequent amendments.
As is stated in the Central Bank’s capital account liberalisation strategy, financial stability will be considered at every stage in the process. In view of this, the Central Bank reserves the right to restrict the total transaction volume in consideration of the impact of the auctions on financial institutions’ liquidity. The final auction amount will be determined by participation. The auction is structured with a single-price format; i.e., all accepted offers will be offered to investors at the same price. Settlement of transactions in all three auctions will take place two days after the conclusion of the auction.
Market makers in the interbank foreign exchange market are invited to act as intermediaries for the purchase of Icelandic krónur in exchange for foreign currency. Specified primary dealers in the bond market will act as intermediaries in the auction involving payment in Treasury bonds. A list of these parties can be found on the Central Bank of Iceland website. Financial institutions that have concluded a collaboration agreement with the Central Bank of Iceland may act as intermediaries (see information below) and will handle investors’ applications for proposed participation in the auction according to the Investment Programme. That auction is open to investors whose applications for participation in the Investment Programme have been approved.
Concurrent with the auctions, the Central Bank, on behalf of the Treasury, is offering to buy back króna-denominated Treasury bonds maturing before end-May 2013 (see the press release from Government Debt Management in the attachment).
Bids shall be submitted no later than 29 August 2012. Further information on the three auctions can be found in the Terms of Auction.
The objective of these measures is to sell Icelandic krónur for foreign currency to parties that have decided to invest in the Icelandic economy or in Icelandic Treasury bonds for at least five (5) years. As such, they contribute to the acquisition of economical long-term Treasury financing and thereby reduce the Treasury’s refinancing need, as well as attracting foreign capital to the country for long-term investment, thus facilitating the removal of the capital controls.
The auction for the purchase of krónur is intended to enable investors to sell their ISK assets in a structured manner if they so choose. The banks’ liquidity is strong enough to tolerate the movement of the krónur that the Central Bank intends to offer to purchase, and the above-mentioned repurchase of Treasury bonds diminishes the potential side effects of those transactions on the bond market.
According to the Central Bank auction calendar, the next auction is scheduled for 3 October. The Central Bank reserves the right to conduct transactions between auctions at a price based on the auction price in the immediately preceding auction.
Further information can be obtained from Már Guðmundsson, Governor of the Central Bank of Iceland, at tel: +354 569-9600.
Terms of Auction for the purchase of foreign currency by the Central Bank of Iceland in exchange for Treasury Bonds. Transaction date: 29 August 2012 (PDF document)
Terms of Auction for the purchase of foreign currency by the Central Bank of Iceland according to the Investment Programme. Transaction date: 29 August 2012 (PDF document)
Terms of Auction for the purchase of Icelandic krónur by the Central Bank of Iceland in exchange for foreign currency. Transaction date: 29 August 2012 (PDF document)
Central Bank of Iceland capital account liberalisation strategy, dated 25 March 2011 (pdf)
Central Bank of Iceland Terms of foreign exchange transactions according to the Investment Programme for capital account liberalisation (with subsequent amendments; first published 18 November 2011)
Intermediaries, custodians, and primary dealers
Press release on the Investment Programme, dated 18 November 2011
26 July 2012