Amended Rules on Foreign Exchange — Removal of restrictions on cross-border movement of capital pursuant to reduction in special reserve ratio
Rules amending the Rules on Foreign Exchange, no. 200/2017, were published on the Central Bank of Iceland’s website today, with the aim to lift restrictions on specific transactions related to recent amendments to the special reserve requirement. The amending Rules were also published in the Law and Ministerial Gazette (Stjórnartíðindi) today and will take effect tomorrow, 3 April 2019. The Rules can be viewed here: In Icelandic - Reglur um breytingu á reglum nr. 200/2017 um gjaldeyrismál, með síðari breytingum.
With Rules no. 200/2017, which took effect on 14 March 2017, most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted. Since then, households and businesses have been largely unaffected by the restrictions laid down in the Foreign Exchange Act, including restrictions on foreign exchange transactions, foreign investment, hedging, and lending; furthermore, the requirement that residents repatriate foreign currency was lifted. Restrictions on specified transactions have remained in place, however, with the aim of reducing the likelihood of carry trade in connection with investments not subject to the special reserve requirement on new inflows of foreign currency (also referred to as the capital flow management tool) pursuant to the Rules on Special Reserve Requirements for New Foreign Currency Inflows. These restrictions are as follows:
- Exportation of securities issued in domestic currency that are comparable to those subject to the special reserve requirement, if investments in them have not been subject to the special reserve base pursuant to the Rules on Special Reserve Requirements for New Foreign Currency Inflows.
- Cross-border movement of domestic currency in relation to specified measures other than those that create a special reserve base, when payment is made directly or indirectly by withdrawal from an account owned by a foreign financial institution (Vostro account). The term specified measures refers to investment options comparable to those subject to the special reserve requirement.
- Loans in domestic or foreign currency, granted by resident entities to non-residents, and repayments of loans between these parties that are allocated to investment options comparable to those that are subject to the special reserve requirement.
With the new Rules on Special Reserve Requirements for New Foreign Currency Inflows, no. 223/2019, which took effect on 6 March 2019, the special reserve ratio was lowered to 0%. Therefore, the premises now exist to lift the aforementioned restrictions, whose objective was to ensure the functionality of the special reserve requirement.
Restrictions on the following will remain in effect, however: i) Cross-border transfers of domestic currency due to transactions with offshore króna assets that are subject to special restrictions pursuant to the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, no. 37/2016. ii) Foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial institution, if domestic currency is a constituent of the transaction. iii) Derivatives transactions involving domestic currency against foreign currency and undertaken for purposes other than hedging against risk or hedging in connection with foreign issuance of króna-denominated bonds (glacier bonds).