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Iceland: Icelandic Central Bank Publishes Amended Rules on Foreign Exchange

(Apr. 29, 2019) On April 2, 2019, the Central Bank of Iceland published an amended version of its rules on foreign exchange. The new provisions lift some, but not all, of the remaining restrictions on foreign exchange that have been in place since Iceland’s 2008 banking crisis. (Press Release, Central Bank of Iceland, Amended Rules on Foreign Exchange — Removal of Restrictions on Cross-Border Movement of Capital Pursuant to Reduction in Special Reserve Ratio (Apr. 2, 2019), Central Bank of Iceland website; Rules Amending Rules No. 200/2017 on Foreign Exchange, with Subsequent Amendments , STJORNARTIDINDI (OFFICIAL GAZETTE), Apr. 2, 2019 (in Icelandic).)
In 2015 Iceland adopted foreign exchange rules as a response to the 2008 banking crisis that rocked the country. Easing these restrictions, including restrictions on the movement of Icelandic currency owned by foreigners and a requirement that Icelandic residents repatriate foreign currency, has been a multistep process, with previous amendments adopted in July 2015 and March 2017. (Elin Hofverberg, Iceland: Easing of Capital Controls and Banking Regulations , GLOBAL LEGAL MONITOR (July 16, 2015); Elin Hofverberg, Iceland: Central Bank Eases Currency Restrictions, Ends Financial Crisis Capital Controls , GLOBAL LEGAL MONITOR (May 16, 2017); Press Release, Central Bank of Iceland, New Rules on Foreign Exchange (Mar. 12, 2017), Central Bank of Iceland website.)
The new measures that took effect on April 3, 2019, were made possible by a reduction in the reserve ratio that had been established in the special-reserve ration rules. According to the Central Bank these rules were introduced in 2016 “with the aim of tempering and affecting the composition of foreign-denominated capital inflows into the domestic bond market and high-yielding deposits, and of strengthening the monetary policy transmission mechanism” by requiring that a special reserve be used for “capital inflows into the bond market and into high-yielding deposits.” Originally introduced at 40% in 2016, but allowed to rise as high as 75%, the reserve ratio was previously lowered from 40% to 20% in November of 2018. (Press Release, Central Bank of Iceland, New Policy Instrument to Temper and Affect the Composition of Capital Inflows (June 4, 2016), Central Bank of Iceland website; Press Release, Central Bank of Iceland, Amended Rules on Special Reserve Requirements for New Foreign Currency Inflows (Nov. 2, 2018), Central Bank of Iceland website.)
On March 6, 2019, the special-reserve ratio was lowered to 0%, which enables the Central Bank to also lift restrictions that were connected with the reserve requirement.
Specifically the eliminated restrictions include the following:

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. Press Release, Amended Rules on Foreign Exchange, supra .)

The rules took effect on April 3, 2019. ( Id .)
Most of the restrictions are thereby lifted, but a number are still in place, specifically the following:
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 nonresidents 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). ( Id .)

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